Sarbanes Oxley also known as SOX was enacted in July 2002. Sarbanes Oxley law enhanced compliance requirements for U.S. public company boards, on the part of any company’s management and public accounting firms.

It is important to note that private companies are not required to comply with the mandates of SOX. Sarbanes Oxley Act was passed in view of the increasing scandals. Corporations like Enron, Tyco and World com suffered major setbacks as a result of these scandals, their share prices went down drastically causing huge losses to investors and loss of public confidence in general.

Let us discuss some important aspects and provisions of SOX.

Role of SEC and PCAOB

Securities and Exchange Commission is responsible for ensuring that all public companies meet the requirements laid down under the act. Non compliance on any part can attract severe penalties. As a part of this mandate, a Public Company Accounting Oversight Board (PCAOB) was also created to look after the audit of all public companies. It requires all audit firms engaged in audit of public companies to get themselves registered with the board.

It acts as an independent body to ensure compliance on part of these accounting and audit firms. It focuses on protection of investor and public interests by overseeing the activities of its registered members. Prior to the creation of this board, there was no independent body to look after the professional conduct of these firms. It can even undertake inspection and investigation of any registered accounting firm and impose fines as per the defined guidelines in case of any discrepancy.

Auditor’s Independence

As a part of SOX compliance, auditor’s independence was given more importance. An audit firm engaged in performing audit services for a particular client can no longer undertake consulting activities and other non audit activities like bookkeeping, financial systems design and implementation services, appraisal or valuation services and so on in respect of that firm. One of the objectives was to avoid conflict of interest between the auditor and the client.

Management Certification under Section 302

Section 302 an important part of SOX requires every company’s Chief executive and Chief financial officer to certify to the correctness, fairness of quarterly and annual financial statements, to establish and monitor disclosure procedures and controls at the end of every specified period. It also requires disclosing material changes in internal controls that may have taken place during the period under review.    Information as to any control deficiencies, material weaknesses or any type of frauds identified is required to be provided to the company’s audit committee and its auditors.

Off Balance Sheet Reporting under Section 401

Investors rely on the financial disclosures made by any company when they undertake any decision with respect to their investments in a particular company. Any misrepresentation of facts and figures or any falsification in such statements can mislead general public. With SOX in force, all off balance sheet items are required to be disclosed as part of financial reporting.

Management’s and External Auditor’s Attestation under Section 404

SOX compliance lays strict emphasis on internal controls over financial reporting (known as ICOFR) and requires as a part of company’s annual reports, management’s attestation to the effect that internal controls and procedures for reporting purposes are adequate and effective. Company’s external auditor is also required to attest and report on management’s assessment.

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