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What is the Sarbanes-Oxley Act and Why Do I Care? (Part One)

What is the Sarbanes-Oxley Act and Why Do I Care? (Part One)

Photo Credit: Damian Gadal

The Sarbanes-Oxley Act, or “SOX” as it is known in day-to-day financial dealings, is a piece of legislation that was brought into action to set new standards for company executive boards, management and public accounting firms in relation to financial reporting. This act has also been known or referred to as the Public Accounting Reform and Investor Protection Act and the Corporate and Auditing Accountability and Responsibility Act.

Named after its two sponsors, Senator Paul Sarbanes and U.S. Representative Michael G. Oxley, this bill was enacted in response to the heavy financial scandals with large corporations like Enron, Tyco and WorldCom – all of which left their investors with billions in losses.

The Sarbanes-Oxley Act is a lengthy piece of legislation that can be daunting in nature and intimidating in length, but in this two part series, we will break down the 11 titles included in the act and hopefully inspire a basic understanding of the laws as they stand today and how they benefit your business and its financial dealings.  These 11 titles all have separate standards and mandates that have been put into action to monitor and maintain a high level of integrity among corporations in their general finance and reporting procedures.

In part one of this breakdown we will cover the first five titles in SOX; they are as follows:

  1. Public Company Accounting Oversight Board: Title one determines the presence of the PCAOB and allows them to provide      oversight for auditors. This title also charges a board with the tasks of registering new auditors, defining compliance audits, quality control and      most importantly enforcing SOX compliance.
  2. Auditor Independence: This title develops a specific set of standards meant to minimize or eliminate unethical conflict. Auditor independence also maps outs the approval process for new auditors as well as auditor reporting rules. A large part of this title prohibits audit companies from providing two different services to the same client. For example, auditing and consulting.
  3. Corporate Responsibility: This portion of SOX requires senior employees and executives to take responsibility for financial accuracy in relation to reporting. This defines the duties and limits of corporate officers and also defines the duties of financial responsibility bestowed upon CEOs and CFOs.
  4. Enhanced Financial Disclosures: A more in-depth process of reporting financial transactions is detailed in this title, which includes details about off-balance sheets, stock transactions and pro-forma figures. This title requires internal control and requires timely reporting of any financial changes within the company.
  5. Analyst Conflicts of Interest: This title of SOX clearly defines the code of conduct that is to be followed by securities analysts. This code is meant to include measures to restore what some call positive investor relations. This title also requires that all existing and potential conflicts of interests in relation to analysts be disclosed.

The first five titles within SOX may be challenging to comprehend, but here at Stock Connections we specialize in helping to ensure that you and your business not only understand SOX, but are 100% SOX and SEC Compliant. Check back on Friday for the second half of the Sarbanes-Oxley Act series and feel free to contact us if you would like to learn more.

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