Background of SARBANES-OXLEY ACT (SOX)  

SoxSarbanes–Oxley was named after spon­sors U.S. Sen­a­tor Paul Sar­banes (D‑MD) and U.S. Rep­re­sen­ta­tive Michael G. Oxley (R‑OH). As a result of SOX, top man­age­ment must indi­vid­u­al­ly cer­ti­fy the accu­ra­cy of finan­cial infor­ma­tion. In addi­tion, penal­ties for fraud­u­lent finan­cial activ­i­ty are much more severe. Also, SOX increased the over­sight role of boards of direc­tors and the inde­pen­dence of the out­side audi­tors who review the accu­ra­cy of cor­po­rate finan­cial statements.

The bill, which con­tains eleven sec­tions, was enact­ed as a reac­tion to a num­ber of major cor­po­rate and account­ing scan­dals, includ­ing those affect­ing Enron, Tyco Inter­na­tion­al, Adel­phia, Pere­grine Sys­tems, and World­Com. These scan­dals cost investors bil­lions of dol­lars when the share prices of affect­ed com­pa­nies col­lapsed and shook pub­lic con­fi­dence in the US secu­ri­ties markets.

The act con­tains eleven titles, or sec­tions, rang­ing from addi­tion­al cor­po­rate board respon­si­bil­i­ties to crim­i­nal penal­ties, and requires theSe­cu­ri­ties and Exchange Com­mis­sion (SEC) to imple­ment rul­ings on require­ments to com­ply with the law. Har­vey Pitt, the 26th chair­man of the SEC, led the SEC in the adop­tion of dozens of rules to imple­ment the Sarbanes–Oxley Act. It cre­at­ed a new, qua­si-pub­lic agency, the Pub­lic Com­pa­ny Account­ing Over­sight Board, or PCAOB, charged with over­see­ing, reg­u­lat­ing, inspect­ing, and dis­ci­plin­ing account­ing firms in their roles as audi­tors of pub­lic com­pa­nies. The act also cov­ers issues such as audi­tor independence,corporate gov­er­nance, inter­nal con­trol assess­ment, and enhanced finan­cial dis­clo­sure. The non­prof­it arm of Finan­cial Exec­u­tives Inter­na­tion­al (FEI), Finan­cial Exec­u­tives Research Foun­da­tion (FERF), com­plet­ed exten­sive research stud­ies to help sup­port the foun­da­tions of the act.

The act was approved by the House by a vote of 423 in favor, 3 opposed, and 8 abstain­ing and by the Sen­ate with a vote of 99 in favor and 1 abstain­ing. Pres­i­dent George W. Bush signed it into law, stat­ing it includ­ed “the most far-reach­ing reforms of Amer­i­can busi­ness prac­tices since the time of Franklin D. Roo­sevelt. The era of low stan­dards and false prof­its is over; no board­room in Amer­i­ca is above or beyond the law.

In response to the per­cep­tion that stricter finan­cial gov­er­nance laws are need­ed, SOX-type reg­u­la­tions were sub­se­quent­ly enact­ed in Cana­da (2002), Ger­many (2002), South Africa (2002), France (2003), Aus­tralia (2004), India (2005), Japan (2006), Italy (2006), Israel, and Turkey

Debate con­tin­ued as of 2007 over the per­ceived ben­e­fits and costs of SOX. Oppo­nents of the bill have claimed it has reduced Amer­i­ca’s inter­na­tion­al com­pet­i­tive edge against for­eign finan­cial ser­vice providers because it has intro­duced an over­ly com­plex reg­u­la­to­ry envi­ron­ment into US finan­cial mar­kets. A study com­mis­sioned by NYC May­or Michael Bloomberg and US Sen. Charles Schumer, (D‑NY), cit­ed this as one rea­son Amer­i­ca’s finan­cial sec­tor is los­ing mar­ket share to oth­er finan­cial cen­ters world­wide. Pro­po­nents of the mea­sure said that SOX has been a “god­send” for improv­ing the con­fi­dence of fund man­agers and oth­er investors with regard to the verac­i­ty of cor­po­rate finan­cial statements.

The 10th anniver­sary of SOX coin­cid­ed with the pass­ing of the Jump­start Our Busi­ness Star­tups (JOBS) Act, designed to give emerg­ing com­pa­nies an eco­nom­ic boost, and cut­ting back on a num­ber of reg­u­la­to­ry requirements.

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