Sarbanes Oxley Act

Definition: Enacted in 2002, and sometimes abbreviated to Sarbox or just Sox, the law that was created to prevent corporate implosions such as those at Enron, Worldcom, and Adelphia Communications. The law put stricter rules on corporate Boards of Directors, executives of corporations, and their auditors (ie: independent firms that check corporations’ financial records).

Example: Among the provisions of Sarbox is the creation of the Public Company Accounting Oversight Board to oversee the activities of firms which audit (ie: examine) the financial records of publicly held corporations.

Investeach explains: The implosions of household names like Enron and Worldcom were truly shocking. Investigations into why they happened showed that blame could be placed on just about every party having a hand in governing these corporations and reporting their financial information to the public.

A recurring problem with these cases is that the uppermost executives claimed to not have known of the activities that lead to their companies’ demise. How could they be blamed when they didn’t know. Sarbanes Oxley resolves this problem by specifically requiring that the CEO and CFO review the financial information the corporation is about to report to the public.

Another enormous issue that arose from these investigations is that employees who knew there were problems were penalized for trying to bring them to the attention of the upper executives. These “whistle blowers” are protected against retaliation by Sarbanes Oxley.

Riddle me this:

1. Identify the corporate scandals that gave rise to the Sarbanes Oxley Act.
2. Identify two provisions of Sarbanes Oxley that were meant to address problems with the corporations whose financial reporting were significantly misstated.
3. Explain how the CEO and CFO of a publicly-held corporation can no longer use the excuse that they didn’t know that the financial information being reported was incorrect.