What is the Sarbanes-Oxley Act of 2002?

The Sarbanes-Oxley Act of 2002 was a landmark piece of financial legislation in the United States, designed to overhaul the regulatory framework pertaining to publicly traded companies. This legislation was passed in response to a series of high-profile cases of accounting fraud that rocked headlines in the early 2000s, including scandals at energy company Enron and telecommunications company Worldcom. The legislation was designed to limit the possibility for accounting fraud on this level in the future.

The bill was spearheaded by a bipartisan team led by Sen. Paul Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio). It includes a number of sections, each designed to address specific regulatory shortcomings the authors felt had contributed to sloppy accounting practices at public companies. Applying to all companies traded publicly, the act also included provisions for the Securities and Exchange Commission (SEC) to make new rules, and established the Public Company Accounting Oversight Board to monitor many of the reforms in the act.

Several provisions of the Sarbanes-Oxley Act of 2002 were important. All were intended to increase accountability and transparency, making it harder for companies to commit acts of accounting fraud. One section, 404, proved to be contentious, as it required companies to establish better internal controls and report on the effectiveness of those controls. Critics of the Sarbanes-Oxley Act of 2002 argued that this section would disproportionately impact small companies, due to the high cost involved in implementing such controls.

Another section of interest, 303, mandates that members of senior management must verify and certify the accuracy of accounting reports. This holds management accountable for false or questionable financial reporting. Section 802 established criminal penalties for violating the law, stressing that instead of simply being a civil wrong, some forms of accounting fraud could be considered criminal under the Sarbanes-Oxley Act of 2002.

Also known as the SOX Law, the Sarbanes-Oxley Act of 2002 was almost unanimously approved by Congress, with a few holdout representatives voting against it. After signing it into law, President George W. Bush indicated he felt it was one of the most important pieces of financial regulation in the United States since the 1930s, when significant overhauls were passed to address the failures that led to the Great Depression. While the Sarbanes-Oxley Act of 2002 certainly closed numerous regulatory loopholes and tightened oversight, critics argued that companies interested in fraudulent practices would find new ways to circumvent the law, staying one step ahead of legislation.