Definitions: Sarbanes-Oxley

Definition

The Sarbanes-Oxley Act of 2002 (Public Company Accounting Reform and Investor Protection Act of 2002  Pub. L. No. 107-204, 116 Stat. 745)  is a United States Federal law originating from Senator Paul Sarbanes, a  democrat from Maryland, and Representative Michael G. Oxley, a republican from Ohio. The law was created in reaction to major corporate accounting scandals, such as those dealing with Enron, Tyco International, Adelphia, and WorldCom. Abuses of corporate power within these companies cost investors and employees billions of dollars, collapsed the affected companies, and radically affected the U.S. stock market.

Business Impact

The law created new and improved rules for all U.S. public company boards, management, and public accounting firms, however; the law does  not encompass privately held companies. The act contains 11 titles that spells out additional corporate board responsibilities, defines criminal penalties that can be enforced, and requires the SEC (Securities and Exchange Commission) to police and judge on the specifications of the new law.

Concerns

Even after it has been in place for several years, there is still some debate over this law. Sections are designed to be interpreted by the SEC, and the benefits of the law have yet to show themselves in protecting the public, or even corporations from themselves. Since this is still fairly new, there have yet to be trials based upon the law to build a foundation of bounds. Also, many companies have even built entire departments to deal with compliance, which means the companies have spent large amounts of money just to ensure they are staying within the law. These additional costs put the American companies at a disadvantage against foreign competitors.

Further information

The law also created a public/government agency, the Public Company Accounting Oversight Board (PCAOB), which has been charged with oversight, inspection, disciplining and auditing of public companies. The law has also increased required external accounting audits, corporate governance, internal controls, and transparent financial disclosure. In return, IT departments must keep more backups and archives of data, which has lead to the need for greater resources to support these additional financial applications.

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