Sarbanes-Oxley Act Case Study
2002, Congress passed the Sarbanes-Oxley Act, known in the industry as SOX, as a measure to improve transparency in financial accounting and to prevent fraud. SOX consists of 11 chapters, or titles, which establish wideranging new regulations for auditors, CEOs and CFOs, boards of directors, investment analysts, and investment banks. These regulations are designed to ensure that
(a) companies that perform audits are sufficiently independent of the companies that they audit, (b) a key executive in each company personally certifies that the financial statements are complete and accurate, (c) the board of directors’ audit committee is relatively independent of management, (d) financial analysts are relatively independent of the companies they …show more content…
Title IV’s Section 401(a) requires prompt disclosure andmore extensive reporting on off–balance sheet transactions.
Section 404 requires that management evaluate its internal financial controls and report whether they are
“effective.” The external auditing firm must also indicate whether it agrees with management’s evaluation of its internal controls. Section 409 requires that a company disclose to the public promptly and in plain English any material changes to its financial condition. Title IV also places restrictions on the loans that a company can make to its executives.
Title V addresses the relationship between financial analysts, the investment banks they work for, and the companies they cover. It requires that analysts and brokerswho make stock recommendations disclose any conflicts of interest they might have concerning the stocks they recommend.
Titles VI and VII are technical in nature, dealing with the SEC’s budget and powers and requiring that several studies be undertaken by the SEC.
Title VIII establishes penalties for destroying or falsifying audit records. It also provides “whistle-blower protection” for employees who report fraud.
Title IX increases the penalties for a variety of
(a) companies that perform audits are sufficiently independent of the companies that they audit, (b) a key executive in each company personally certifies that the financial statements are complete and accurate, (c) the board of directors’ audit committee is relatively independent of management, (d) financial analysts are relatively independent of the companies they …show more content…
Title IV’s Section 401(a) requires prompt disclosure andmore extensive reporting on off–balance sheet transactions.
Section 404 requires that management evaluate its internal financial controls and report whether they are
“effective.” The external auditing firm must also indicate whether it agrees with management’s evaluation of its internal controls. Section 409 requires that a company disclose to the public promptly and in plain English any material changes to its financial condition. Title IV also places restrictions on the loans that a company can make to its executives.
Title V addresses the relationship between financial analysts, the investment banks they work for, and the companies they cover. It requires that analysts and brokerswho make stock recommendations disclose any conflicts of interest they might have concerning the stocks they recommend.
Titles VI and VII are technical in nature, dealing with the SEC’s budget and powers and requiring that several studies be undertaken by the SEC.
Title VIII establishes penalties for destroying or falsifying audit records. It also provides “whistle-blower protection” for employees who report fraud.
Title IX increases the penalties for a variety of