Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 was born in the aftermath of the notorious collapse of several publicly-traded firms (Enron, WorldCom, Global Crossings) in the US, amending the Securities Act of 1933 and the Securities and Exchange Act of 1934. The legislation focuses on issues of corporate governance and accountability, and in particular, at ensuring that the individuals at the highest levels of a corporation take responsibility for the accuracy and timely availability of financial information about their firms, and that public accounting firms perform audits using a prescribed standard for accountability and internal control.

The legislation featured a number of sections that have a direct impact on business and accounting practices, accountability, transparency, and timeliness of information. Much of this legislation focuses on establishing standards by which public company accounting and auditing must be conducted, establishing an oversight organization (the PCAOB), as well as defining the process by which corporations must conduct their business in order to accurately inform the investing public about their financial and operational condition. Some of the sections of most interest to public companies include:

Section 302: Certification of the reported financial results by key officers of the company.

Section 404: Internal Controls that must exist, and in their absence, may signify the need for auditors to reveal a material weakness or a significant deficiency in the controls (which may put the financial statements in question).

Section 409: Timely disclosure of information about the company’s financial condition or operations that may be considered material by the investing public.

This legislation applies to any firm that is publicly traded on a US-based exchange. Thus, even though a corporation may be based outside the US, if traded here, they remain subject to the requirements of Sarbanes-Oxley. Firms found to be out of compliance with the requirements will be subject to disclosure letters from their auditors, stating that material weaknesses or significant deficiencies have been identified.

Similar legislation in other parts of the world is being considered (Australia, Canada, Chile, India, Mexico, EU), subsequent to the passage of Sarbanes-Oxley, and based upon concerns heightened by similar financial accounting scandals around the globe, though no requirements on the scale of Sarbanes-Oxley have yet been enacted.

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