The Sarbanes-Oxley Act, commonly shortened as SOX or Sarbox, is a federal law passed in 2002 that imposes certain requirements on publicly traded companies in the United States. Named after its sponsors, United States Representatives Michael G. Oxley and Senator Paul Sarbanes, the act was enacted in response to the various frauds by high-profile corporate organizations in the late 1990s. It is designed to protect investors and shareholders by increasing corporate transparency and accountability.
What the Sarbanes-Oxley Act Does
The Sarbanes-Oxley Act significantly strengthened the rules by which companies must abide in order to trade publicly, with a particular focus on corporate accounting. Some of the main requirements of the act include improving the accuracy of corporate financial disclosures by establishing internal controls, as well as mandating improved corporate governance and an increased ethical standard for those inside the company. It also requires that executives of public companies must certify the accuracy of their financial statements, and it limits the ability of companies to offer personal loans to executives.
Benefits of the Sarbanes-Oxley Act
The purpose of the Sarbanes-Oxley Act is to protect investors and the public from fraud by improving the accuracy of corporate financial statements. By increasing corporate transparency and imposing stricter regulations, the act has resulted in improved corporate governance and better protection of shareholders’ investments. The act has also increased the ethical standards of corporate executives and other individuals involved in the company, and it has led to better overall management of financial records.
Conclusion
The Sarbanes-Oxley Act has played an important role in improving investor confidence by increasing corporate transparency and accountability. By providing improved corporate governance and ethical standards, as well as mandating improved internal financial controls, SOX has made it easier for the public to invest in the stock market with confidence. It has also helped to prevent fraud and abuse by corporate executives.