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Sarbanes-Oxley Act (SOX)

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The Sarbanes-Oxley Act is a United States federal law placing requirements on the financial record keeping and reporting of public companies, their boards, their management and the accounting firms that audit them. Congress passed it after the Enron and WorldCom accounting scandals exposed auditor conflicts of interest and weak corporate governance, and President George W. Bush signed it into law on July 30, 2002 as Public Law 107-204, authored by Senator Paul Sarbanes and Representative Michael Oxley. Its eleven titles created the Public Company Accounting Oversight Board to oversee firms auditing public companies, required chief executives and chief financial officers to personally certify the accuracy of financial statements, restricted the consulting services an auditor may sell its own audit client, and enhanced criminal penalties for corporate fraud.

Facts
Era
United States, signed into law July 30, 2002 (Public Law 107-204) 1
Promulgated By
The 107th United States Congress, authored by Senator Paul Sarbanes and Representative Michael Oxley, signed by President George W. Bush; enforced by the Securities and Exchange Commission and the Public Company Accounting Oversight Board it created 1
Jurisdiction Scope
United States public companies, their boards, management, and the public accounting firms that audit them 1
Regulatory Domain
Corporate financial reporting, auditor independence and public company accounting oversight 1
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How Enron Rewrote the Rules of Corporate Bookkeeping

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

Before October 2001, an American company could hide enormous liabilities from its own shareholders using an accounting device called a special purpose entity, a separate legal shell the parent company technically did not control on paper, whatever it controlled in practice. Enron, at the time the seventh largest company in the United States by revenue, used exactly this device to keep billions of dollars in debt off its own balance sheet, with its outside auditor, Arthur Andersen, signing off the whole way. When the structure collapsed, Enron collapsed with it, followed within months by WorldCom, and Arthur Andersen itself, an accounting firm that had existed for eighty-nine years, did not survive the year after that. Congress moved with a speed federal financial regulation rarely shows: Senator Paul Sarbanes and Representative Michael Oxley authored a bill that passed the House 423 to 3 and the Senate 99 to 0, and President George W. Bush signed it on July 30, 2002, less than a year after Enron first admitted its accounting was fictional. The Sarbanes-Oxley Act did not just punish what Enron had done. It rebuilt the machinery meant to catch the next one. It created the Public Company Accounting Oversight Board, a body with no equivalent before 2002, to inspect and discipline the firms that audit public companies, taking that job away from the accounting profession policing itself. It required a company chief executive and chief financial officer to personally sign their own name to the accuracy of the financial statements they filed, turning what had been a corporate assertion into a personal one with personal criminal exposure attached. It restricted how much consulting work an audit firm may sell to the very company it is supposed to be auditing without bias, the exact conflict of interest that let Arthur Andersen keep collecting Enron consulting fees while blessing Enron books. None of these provisions prevent fraud outright. What they do is remove the deniability that let Enron happen: no single named individual signed off on the deception, no single firm had a clean incentive to catch it, and no single watchdog existed to check the watchdogs. Twenty years later, the corporate scandals that still happen tend to look different in kind, not because dishonesty disappeared, but because the specific blind spot Enron exploited got closed.

Cross-Tradition Connections

Authored By

Michael Oxley, Jurists

House sponsor.

Paul Sarbanes, Jurists

Senate sponsor.

In Legal System

Sources
1. Sarbanes-Oxley Act (Wikipedia)
Wikipedia, Sarbanes-Oxley Act, lede and Provisions sections
Quote, Wikipedia, Sarbanes-Oxley Act, lede and Provisions sections
eleven sections placing requirements on public company boards, management, and accounting firms
View the Source
1. Sarbanes-Oxley Act (Wikipedia)
Authored By: Paul SarbanesView the Source
1. Sarbanes-Oxley Act (Wikipedia)
Authored By: Michael OxleyView the Source
1. Sarbanes-Oxley Act (Wikipedia)
In Legal System: Common LawView the Source
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