Sarbanes Oxley Act–SOX 2002

The Sarbanes–Oxley Act of 2002

Sarbanes-Oxley Act A bill whose goal was to renew investors’ trust in corporate executives

and their firms’ financial reports; the act led to significant reforms in the content and preparation of disclosure documents by public companies

In the legal system Sarbanes–Oxley Act of 2002, established requirements for internal controls to govern the creation and documentation of accurate and complete financial statements. (compliance usually refers to behavior in accordance with legislation )

Further , this act demonstrates that an outsourcing firm has effective internal controls in accordance with the Sarbanes-Oxley Act of 2002.eg:

• · Set clear, firm business specifications for the work to be done
• · Establish reliable satellite or broadband communications between your site and the outsourcer’s location.
• · Require vendors to have project managers at the client site to overcome cultural barriers and facilitate communication with offshore programmers.
• · Require a network manager at the vendor site to coordinate the logistics of using several communications providers around the world.

The Sarbanes–Oxley Act of 2002 was passed in response to public outrage over several major accounting scandals, including those at Enron*, WorldCom, Tyco, Adelphia, Global Crossing, and Qwest—plus numerous restatements of financial reports by other companies, which clearly demonstrated a lack of oversight within corporate America. The goal of the bill was to renew investors’ trust in corporate executives and their firms’ financial  reports. The act led to significant reforms in the content and preparation of disclosure documents by public companies. However, the Lehman Brothers accounting fiasco and resulting collapse as well as other similar examples raise questions about the effectiveness of Sarbanes–Oxley in preventing accounting scandals.

Section 404 of the act states that annual reports must contain a statement signed by the CEO and CFO attesting that the information contained in all of the firm’s SEC filings is accurate. The company must also submit to an audit to prove that it has controls in place to ensure accurate information. The penalties for false attestation can include up to 20 years in prison and significant monetary fines for senior executives. Section 406 of the act also requires public companies to disclose whether they have a code of ethics and to disclose any waiver of the code for certain members of senior management..

*The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure. Enron was formed in 1985 , when Jeffrey Skilling was hired, he developed a staff of executives that were able to hide billions of dollars in debt from failed deals and projects.This was done by the use of accounting loopholes, special purpose entities, and poor financial reporting. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies.One piece of legislation, the Sarbanes–Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.