Definition: The Sarbanes Oxley Act or SOX is a law passed by Congress in 2002 that was designed to regulate and provide oversight for the financial markets in the United States.
What Does SOX Mean?
The Sarbanes Oxley Act was enacted after numerous accounting and financial fraud scandals occurred in the late 1990s including Enron and Tyco. The purpose of SOX was to provide investors with more transparency and accountability from publicly traded companies.
SOX was the broadest and most significant legislation in the financial markets since the Securities Acts of 1933 and 1934. The Sarbanes Oxley Act created the Public Company Accounting Oversight Board or PCAOB to oversee all publicly traded companies and create accounting rules and principles for these companies. Until 2002, this was the job of the FASB.
SOX also strengthened the severity of penalties for executive officers. CEOs and CFOs are now required to maintain proper internal controls and personally sign off on financial statements. Executive officers are no longer allowed to plead ignorance when it comes to fraudulent financial activity inside the company. If a publicly traded company fraudulently reports activity, the executive officers cannot only be fined, but they can also be imprisoned.
Publicly traded company penalties are also more severe. Companies in violation of the PCAOB standards can be delisted and fined. The PCAOB also requires that auditors must check and verify that company internal controls are in place and effective. Before 2001, auditors were never required to test the presence and effectiveness of internal controls in this manner.