Introduction: The Sarbanes-Oxley Act (SOX) of 2002 is a legislation enacted to protect shareholders from accounting errors.

It is named after senator Paul Sarbanes and Michael Oxley. The Act is administered by the Securities and Exchange Commission (SEC) that sets deadline for rules and requirements. It is an Act to protect investors by improving the accuracy and reliability of the corporate disclosures. It is a United States federal law that sets new standard for all U.S. public company boards and accounting firms. Characteristics: 1. Legislation and regulation (SOX, SEC rules) to strengthen corporate accountability and improve corporate governance. 2. The move towards more transparent and timely financial report. 3. A redefining of roles and responsibilities of those who are directly or indirectly involved in the financial reporting process (example: directors, officers, advisers and investors). Major elements of SOX: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Public company accounting oversight board (PCAOB) Auditor independence Corporate responsibility Enhanced financial disclosure Analyst conflicts of interest Commission resources and authority Studies and reports Corporate and criminal fraud accountability White collar crime penalty enhancement Corporate tax returns Corporate fraud accountability

Events contributing to the adoption of SOX: A variety of complex factors created the SOX in which series of corporate frauds that occurred between years 2000 and 2002. These problems resulted in the lack of auditors independence and weak corporate governance. Before SOX auditing firms were self-regulated: 1. Auditor conflict of interest 2. Board room failures

3. 4. 5. 6.

Security analysts conflict of interest Inadequate funding of the SEC Banking practices Internet bubble

Benefits of the Sarbanes-Oxley compliances: Enhanced understanding of the control design and operations effectiveness. Duplicate controls are more easily identified and eliminated. Increase the independence of auditors as well as the role of the board of directors. Investors demand on accountability and companies depend more on corporate governance practices.

The Sarbanes-Oxley Act has 7 major sections: 1. 2. 3. 4. 5. 6. 7. SOX 302: Disclosure Controls SOX 303: Improper influence conduct of audits SOX 401: Disclosures in periodic reports(off-balance sheet) SOX 404: Assessment of internal control SOX 802: Criminal penalties for influencing US Agency investigation / proper Administration SOX 906 Criminal Penalties for CEO/CFO Financial statement certification SOX 1107 Criminal penalties for retaliation against whistleblowers

Advantages and Disadvantages: Advantages: 1. Important reform in the financial reporting of the U.S. 2. The Act came to give confidence to the public after the shock of WorldCom and Enron. 3. SOX directly influenced the responsibilities of BOD, auditors and analysts. 4. SOX provides new rules for firms to take risks for applying tax services. Disadvantages: 1. The demand of large internet controls takes extra time which became a reason for delays in financial reports. 2. Public corporations have yearly expenses concerning audit and that contributes in the increase in the cost of business and higher accounting fees. 3. Penalties and taxes are applied for accounting in SOX.

Conclusion: The Sarbanes-Oxley Act is an event:

Strengthening disclosure and internal control requirements. Creating auditors independence. Introducing corporate governance. A great impact on investors protection and confidence.