Sarbanes-Oxley Act

Definition

The Sarbanes-Oxley Act is a federal law enacted in 2002 that established new standards for public company boards, management, and public accounting firms. It was introduced in response to a series of high-profile corporate accounting scandals to improve financial reporting and transparency, and to protect investors.

5 Must Know Facts For Your Next Test

1. The Sarbanes-Oxley Act was a direct response to major corporate accounting scandals, such as Enron and WorldCom, which eroded public trust in the financial reporting of public companies.
2. The Act established new requirements for public companies, including the creation of an independent audit committee, CEO and CFO certification of financial reports, and increased penalties for corporate fraud.
3. The Act mandates that public companies implement and maintain effective internal controls over financial reporting, with management required to assess and report on the effectiveness of these controls annually.
4. Sarbanes-Oxley also prohibits public companies from providing certain non-audit services to their independent auditors, in order to maintain auditor independence and objectivity.
5. Compliance with the Sarbanes-Oxley Act is overseen by the Public Company Accounting Oversight Board (PCAOB), an independent regulatory body created by the Act.

Review Questions

• Explain how the Sarbanes-Oxley Act addresses ethical and legal issues in entrepreneurship.
  • The Sarbanes-Oxley Act was enacted to address ethical and legal issues in entrepreneurship by improving the accuracy and reliability of financial reporting for public companies. It does this by establishing new standards for corporate governance, internal controls, and auditor independence. The Act aims to restore investor confidence and protect the public from fraudulent accounting practices, which are critical ethical and legal concerns for entrepreneurs and businesses operating in the public market.
• Describe the key provisions of the Sarbanes-Oxley Act and how they impact the responsibilities of company leadership.
  • The Sarbanes-Oxley Act includes several key provisions that significantly impact the responsibilities of company leadership. These include the requirement for CEOs and CFOs to personally certify the accuracy of financial reports, the mandate for public companies to maintain effective internal controls over financial reporting, and the prohibition on auditors providing certain non-audit services to their clients. These provisions hold company leaders accountable for the accuracy and integrity of their organization's financial information, requiring them to implement robust systems and processes to ensure compliance with the law.
• Analyze how the Sarbanes-Oxley Act has influenced the landscape of corporate governance and financial reporting for entrepreneurial ventures.
  • The Sarbanes-Oxley Act has had a profound impact on the landscape of corporate governance and financial reporting for entrepreneurial ventures, even those that are not publicly traded. By establishing new standards for transparency, accountability, and internal controls, the Act has raised the bar for ethical and responsible business practices. Entrepreneurs must now navigate a more stringent regulatory environment, with increased scrutiny on their financial reporting and governance structures. This has led many entrepreneurial firms to proactively adopt Sarbanes-Oxley-inspired practices, even if not legally required, in order to demonstrate their commitment to ethical and transparent operations. The Act has also influenced the due diligence process for investors evaluating potential entrepreneurial investments, as they seek assurances of sound corporate governance and reliable financial information.

Related terms

Corporate Governance:

The system of rules, practices, and processes by which a company is directed and controlled, including the relationships among the stakeholders and the goals for which the corporation is governed.

Internal Controls: The policies, procedures, and activities put in place by an organization to ensure the integrity of financial and accounting information, promote operational efficiency, and comply with laws and regulations.

Financial Reporting: The process of recording, summarizing, and reporting a company's financial transactions and overall financial performance to internal and external stakeholders.