Sarbanes-Oxley Act (SOX)

Definition

The Sarbanes-Oxley Act (SOX) is a U.S. federal law enacted in 2002 to protect investors from fraudulent financial reporting by corporations. It mandates strict reforms to improve financial disclosures and prevent accounting fraud.

5 Must Know Facts For Your Next Test

1. SOX was enacted in response to major corporate scandals like Enron and WorldCom.
2. The act requires companies to establish internal controls and report on their effectiveness.
3. Section 404 of SOX specifically deals with the management assessment of internal controls over financial reporting.
4. Non-compliance with SOX can result in severe penalties, including fines and imprisonment for executives.
5. SOX created the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies.

Review Questions

• What are the primary objectives of the Sarbanes-Oxley Act?
• Which section of SOX deals with internal controls over financial reporting?
• What organization was established by SOX to oversee public company audits?

Related terms

Internal Controls:

Processes implemented by a company to ensure the integrity of financial and accounting information.

Public Company Accounting Oversight Board (PCAOB):

A nonprofit corporation established by SOX to oversee audits of public companies.

Financial Reporting:

The disclosure of financial results and related information to management and external stakeholders about how a company is performing over a specific period.