Signed into law in 2002, the Sarbanes-Oxley Act (or SOX, as some prefer to call it) has now been with us for almost two decades.
Despite this, many operatives in both large and small companies still have little idea about the significance of SOX, save for the ways in which it affects them directly.
However, SOX has had huge ramifications for the culture around financial integrity in large institutions. Whether we realize it or not, it has affected all of us.
So, exactly what is the purpose of SOX? Read on to find out.
What Is the Purpose of SOX?
The late 20th century saw a spate of high-profile corporate scandals. The most famous of these was that involving the Enron Corporation.
Anyone even remotely familiar with the world of business has heard of Enron. The Texan energy company, once considered a major player in America’s corporate world, went bankrupt in 2002 after a host of fraudulent reporting practices came to light.
By the time it folded, Enron Corporation had lost its investors $74 billion.
Scandals like this convinced US policymakers that something had to be done. Their response was the Sarbanes-Oxley Act, which took its name from the two men who sponsored it; Sen. Paul Sarbanes and Rep. Michael Oxley.
SOX brought in much stricter rules on financial reporting than had ever been seen before in the United States. These included much more extensive reporting requirements, increased recordkeeping requirements, and modified accounting practices.
Significantly, the Sarbanes-Oxley Act imposes criminal liability on company officers who sign off on documents that they know to be false. This level of accountability was designed to undo the culture of silence that surrounded false reporting in many major corporations.
What Does SOX Mean for My Company?
One of the major criticisms of the Sarbanes-Oxley Act is that it is cumbersome for companies. Unfortunately for those in charge of reporting, this criticism is entirely valid.
That is, to some extent, the point. In order to ensure probity and compliance in the world of business, regulators have to be exacting. However, the stringent reporting requirements set out by SOX have huge potential to land executives in hot water, even for innocent mistakes.
Many parts of the Act give huge discretion to authorities when it comes to prosecution. Section 404, for example, requires reporting executives to outline in detail any process which could affect financial results, and penalties for failure go up to 20 years in prison.
This isn’t something anyone wants to face as a consequence of sloppy office work.
It is important to note that the provisions of the Sarbanes-Oxley Act apply to private companies as well as publicly-traded ones.
If you have run into trouble due to an infraction of SOX rules, you should enlist legal help as soon as possible. This criminal defense attorney deals extensively with white-collar cases, and should be able to set you on the right course of action to clear your name.
What Has SOX Achieved in the Business World Generally?
The 21st century has been an undoubtedly turbulent one, both in the world of business and finance and in the world in general.
Having emerged from the global financial crisis of 2008, we are now faced with an even bigger challenge. The COVID-19 pandemic has caused the biggest financial market shock since the second World War.
With all this in mind, it can be difficult to accurately assess the effects of SOX.
The mortgage crisis occurred just six short years after the Act’s initiation, and lasted for over half a decade. While recovery since then has been strong, it doesn’t give us a lot to work with in terms of overall market trends.
However, if we look at firm culture on a micro level, it’s clear that much has changed.
Sarbanes-Oxley has created a culture of compliance within firms nowadays. Many executives report that the standards set out by the Act have created a more responsible reporting environment. A lot of senior staff value the clarity that SOX has offered in terms of reporting requirements.
Because it has now been around for so long, executives have grown used to SOX. Business practices have developed around it, rather than in spite of it.
Will There Be Changes Going Forward?
Regulation is an area in which change is inevitable. Given the pace at which technology is changing our financial landscape (through, for example, algorithmic trading) this is more true now than ever.
However, the Sarbanes-Oxley Act is a robust piece of legislation. America’s lawmakers won’t be in a rush to change it unless there is a specific reason to do so.
Criticisms have, of course, abounded. However, American policymakers will not be keen to amend a set of laws which have been so effective in curtailing financial fraud. Even the Trump administration, which has been uniformly disdainful of corporate regulation, has not made any serious moves towards amending the legislation.
In short, SOX is here to stay for the foreseeable future.
Staying Compliant in 2020
So, what is the purpose of SOX? By now you should have a better idea of the answer to this question, as well as to how this all affects your operations.
While understanding SOX compliance might seem like a headache, it’s easier than it looks. If you take the time to research it properly, you’ll soon know it well.
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