The SOX law is also known as the Sarbanes-Oxley Act. This act was passed in 2002 by the United States Congress to protect the public and investors from false scandals held by major corporate entities. It was observed that in the early 2000s in U.S. various accounting scandals were seen by various companies such as Enron, Tyco, and WorldCom., so it became important to look after public and investor interest in the country. This act was named after the two congressmen who drafted this act, Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH-4). Security and Exchange Commission of the U.S. administered this act. The legislation entails stringent measures to strengthen corporate financial transparency and avoid accounting fraud. Thus, we can say that it is not just a legal obligation but also a good business practice.
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Who must comply with the SOX law?
- All the public companies along with their wholly-owned subsidiaries working in the U.S. are compiled under this law.
- All the foreign companies that are treated as a public unit company and carry out their business in the U.S. also comply under this act.
- If any private company is ready to go public with IPO needs to register under SOX law and are compliant with the act.
- All private companies and charitable & nonprofit institutions do not comply with this act.
- The first requirement is that the Chief Executive Officer (CEOs) and Chief Financial Officer (CFOs) are directly responsible for the accuracy and correct documentation, and submission of all financial reports as well as the internal control structure to the Securities and Exchange Commission.
- The second requirement for SOX law is that it requires an Internal Control Report which states that management is responsible for an adequate internal control structure for their financial records.
- The companies under SOX law require communication of data security policies and consistent enforcement of data security policies. Companies should implement a complete data security strategy that protects all financial data stored and utilized during normal operations.
- Another requirement is that companies must maintain the documentation proving that they are compliant and continuously monitoring and measuring SOX compliance objectives.
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Importance of SOX Compliance:
- SOX act provides a strong control structure to the company by the Internal Control Report which states that management is responsible for an adequate internal control structure for their financial records. This not only fulfills the requirement of the SOX act but also makes aware the companies that how important is to control such financial data for the success of the company.
- SOX also provides you a data security platform that identifies the permission issues and to find financial data and to protect you from data breaches or ransomware attacks.
- It helps in providing a better audit to the companies and helps in economic growths. The act states that if the inter audit outcome is better than the external audit will be more effective.
- As the main objective of this act is to provide proper and correct financial reports for the public and investors thus this act will help in providing transparency in the financial reports in comedies that comply under this act.
Thus we can say that the SOX act was implemented in the U.S. to protect the interest of the public and investors from fraudulent and erroneous practices that companies do to increase their profit and revenue. The other motive of this act was to increase the transparency in the financial data of the company to make an effective control system by the Security and Exchange Commission of the U.S. of various companies. Thus this act proves as an effective tool to measure the company’s financial stability and ethical behavior of the company.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.