1. Legislative Genesis
The Sarbanes-Oxley Act (SOX) was enacted by the US Congress to restore investor confidence following massive corporate accounting scandals (such as Enron and WorldCom). It fundamentally altered corporate accountability and internal control testing for all public companies trading on US stock exchanges.
 
2. Landmark Sections and Executive Accountability
Section 302: Corporate Responsibility for Financial Reports
Requires the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to personally sign and certify each quarterly and annual financial report. By signing, they declare under penalty of perjury that the statements are free from material misstatements and that internal controls have been reviewed within the last 90 days.
Section 404: Management Assessment of Internal Controls
Mandates that companies maintain an adequate internal control structure and procedures for financial reporting.
  • Management Requirement: Annual reports must contain an internal control assessment stating management’s responsibility for establishing and maintaining controls, alongside their conclusion on control effectiveness.
  • Auditor Requirement: Independent auditors must test and issue an explicit attestation report on the effectiveness of the company’s internal controls over financial reporting (ICFR).

3. Structural Governance Reforms under SOX
  • Establishment of the PCAOB: Created the Public Company Accounting Oversight Board to independently register, inspect, and discipline public accounting firms.
  • Clawback Provisions: Enables the corporation to seize and claw back executive bonuses and stock-option profits if financial statements must be restated due to misconduct.
  • Whistleblower Protection: Section 806 criminalizes retail retaliation against employees who report internal financial fraud, mandating that audit committees establish anonymous channels for submitting complaints.

 
PreviousNext