YOU ASK:

What is the Sarbanes-Oxley Act of 2002?

WE ANSWER:

The Sarbanes-Oxley Act came into force in 2002 in an attempt to curb the spreading acts of corporate fraud and corruption and protect the small businesses. Upon its enactment, the Sarbanes-Oxley Act of 2002 ushered in changes in the corporate governance regulations. The legislation, which carries the names of its creators Senator Paul Sarbanes and representative Michael Oxley, sets certain corporate accountability requirements that all companies in the United States have to comply with.

Key Sarbanes-Oxley Act Sections

The Sarbanes-Oxley Act is divided into 11 sections altogether. The following sections are considered the most significant:

  • Section 302 pertains to corporate periodic financial reports which are required to contain a number of certifications. For instance, the company's CEO and CFO must review the reports, and are accountable for the validity of the statements and all information that present the company's current financial situation. Companies must not try to avoid these requirements in any way, including by establishing off-shore branches.
  • Section 401 is concerned with "Disclosure in Periodic Reports". Under this section, financial statements must contain correct and accurate information about the material conditions of a company, including transactions, obligations and off-balance liabilities. The reports have to be presented in a straightforward manner and not be misleading.
  • Section 404 has to do with "Management Assessment of Internal Controls" and it requires issuers to include in their periodic reports information about their internal control structure, including information about the accounting firm auditing the papers of the company. It is forbidden for a corporation to employ the same accounting firm for both auditing and non-auditing services.
  • Section 409. Under this section, issuers must promptly notify the public if any material or financial changes occur in the company.
  • Section 802 pertains to penalties for tampering with company records or documents. If exposed, the responsible party will have to pay a fine and may even be sentenced to imprisonment for up to 20 years.
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