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Importance of Sarbanes-Oxley Act


Sarbanes - Oxley Act is the United States federal law that amended and supplemented existing requirements in corporate financial reporting and accounting practices. Commonly called SOX Act was signed into law by President Bush on July 30, 2002. After highly publicized corporate financial scandals including Enron and WorldCom the purpose of the Act was to restore investor's shaken confidence in the market and truthfulness of corporate financial statements and close loopholes in the law that led to fraud.

The Act that got the name from two sponsors Sen. Paul S. Sarbanes and Rep. Michael G. Oxley created strict new rules for accountants, auditors, corporate officers and more strict record keeping requirements. Also it added new, more stringent criminal penalties for violation of this law. The new law set out reforms in four principle areas: corporate responsibilities, criminal punishment, accounting regulations and new protections. SOX is a lengthy and complex peace of legislation but we will single out couple of key provisions.

Publicly traded companies file period and annual financial reports where they provide investors, partners and market with information about company's assets, liabilities and revenues. Reported financial information has crucial importance in company share price and in investors decision whether to buy or sell particular stock. Misleading and fraudulent financial statement can cause serious harm to investors, other businesses and market on the whole.

Sarbanes -Oxley requires senior corporate officers to personally certify in writing accuracy of their financial statements. Corporate officers who knowingly certify false financial statements can go to prison.

Management and auditors must establish internal control and reporting methods to provide adequacy of that control. Periodic financial reports includes internal control report and annual report includes assessment of efficiency of that internal control.

Before SOX accounting was self-regulatory profession. Act created Public Company Accounting Oversight Board (PCAOB), a private sector, non-profit corporation that oversees the audits of public companies in order to protect the interest of investors.
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