Sarbanes Oxley Law, more commonly known as SOX, is a popular legal tool to ensure that the right measures of corporate governance are infused in the business operations to avoid any corporate scams or misreporting. In fact, the area governed by this act is much larger and diverse, yet the eventual aim is to curtail any illegal activity in the business sphere by tightening the grip of law on the overall operations, especially the financial proceedings.
The requirements of the act regarding the implementation of strong internal controls are simple and straightforward. Evaluating their strength and weaknesses, through regular disclosures, prevents frauds and scams from due to misrepresentation or misreporting. To sum up, “corporate transparency” is the key mantra.
About The Act:
Different sections cater to different areas and functionalities of an organization–all ultimately aimed at restricting the potential illegal activities. For example, several sections, like 302, 404, and 409, deal with the information technology aspect.
SOX put a lot of emphasis on the company’s disclosure policies. It has been observed that the biggest scandals have been energized by the company’s tendency to hide information or present partial information to disorient the shareholders and other concerned parties. Therefore, as mandated by the sections of the act, companies have to be more transparent in their functioning at both micro and macro levels.
SOX place the responsibility on the owner of the vehicle and not the driver. All important certifications and disclosures are mandated to be made by the principal officers concerned. The implied penalties and subsequent enforcement actions are most strongly felt by the company leaders. You can no longer escape the charges by firing a junior executive.
The scope of the coverage extends beyond the physical United States borders. It regulates the overseas operations of companies publicly traded on the U.S. exchanges.
The act is further known for its tight deadlines and effective penalty and enforcement implications.
Considering the sharp increase of financial scams and their intractability, SOX aims to keep a track of the company’s internal functioning patterns and information disclosure guidelines. Keeping the same in mind, the law mandates the highest officials including CEOs to certify the information made public.
Though legally binding only for public companies, if could positively impact private companies’ overall functioning and operational capabilities.
Quick Note: This article is intended to give you just an overview of the pros and cons of the Sarbanes Oxley Act as applicable for the public limited companies. However, the exact implications and rules must be carefully reviewed and applied to avoid any legal mishaps. Furthermore, it is recommended to seek guidance for the SOX compliance of daily operations.