TheSarbanes- Oxley act (SOX) is an act enacted in 2002 and passed by theU.S congress to offer protection to the investors against thepossibility of occurrence of fraudulent accounting practices by thecorporations. The SOX stipulates stern provisions that foster thedisclosure of financial information by corporations and thus enhancethe prevention of accounting fraud. This act was initiated inresponse to several scandals in corporation which shook the worldfinancial markets (Mishra & Dhillon, 2008). These scandalsinclude Tyco, WorldCom and Enron which lowered the confidence ofinvestors on reliability of financial statements and thus facilitatedthe amendment of regulatory standards.
SOXobjective targets to reinforce corporate oversight and consequentlystrengthen internal corporate control. Its sole purpose is protectionof shareholders from representations which are fraudulent incorporate financial statements. For investors to feel secured theyhave to understand that the financial information they depend upon isreliable and true, and that independent third party has confirmed itsaccuracy (Mishra & Dhillon, 2008).
SOXact is a collection of several laws which are very long andcumbersome, but the most outstanding provisions include thefollowing: section 302 which confines the corporate management tocertify that they have conducted financial statements review and inthe process ascertain whether they are truthful and accurate (Mishra& Dhillon, 2008). Section 404 makes provision that confines themanagement to disclose the procedures of corporate internal controlwhether they are effective and adequate or not. For the case ofcompanies trading publicly, their cost implications are significantlyhigh and in the process expensive to develop and keep the requiredinternal controls.
Section409 makes provisions that require the management to constantly updatethe investors of essential financial information contrary to theusual waiting until quarterly or annual report. Section 802 setspenalties that are enforced upon violations of the rules contained inthe act which can involve imprisonment or fines (Anand &Tarantino, 2010). Section 406 sets a regulation that requirescompanies to disclose whether they have developed appropriate code ofethics that prohibits any practice of fraudulent to its principalaccounting officer, principal financial officer and principalexecutive officer. And also it requires the companies to disclose anychanges in the set codes of ethics, in the event the companies havenot set the code of ethics, this regulation requires that theyprovide an explanation as to why the code ethics have not beenadopted (Anand & Tarantino, 2010).
Ineffect this act makes it a mandatory requirement that companies inthe US fully comply with the disclosure requirements of the code ofethics in their annual reports (Anand & Tarantino, 2010). Theprovisions require the companies to post their code of ethics eitherin the company’s web site, the annual report or offer a copy whenrequested by the shareholders. This act has helped foster thedevelopment of the appropriate code of ethics that guides thecompanies operation.
Theact makes the companies implement these ethics which significantlyprevent fraudulent cases within corporation. In addition, the code ofethics provides a means of addressing any arising conflict and thusfacilitates an efficient internal control (Anand & Tarantino,2010). The act provides clearly the process of enforcing thepenalties when the companies fail to comply with these provisions.Therefore, these provisions have offered transparency of companies’operation and hence guarantee security to the shareholders
Mishra,S., & Dhillon, G. ( 2008). The Impact of the Sarbanes-Oxley (SOX)Act on Information Security.
Anand,S., & Tarantino, A. (2010). Sarbanes Oxley in leading economies.Upper Saddle River, N.J: Prentice Hall.