The Sarbanes Oxley Act was passed in 2002 in response to corporate scandals such as Enron and WorldCom. The act contains 11 titles, which prescribe requirements for public companies, audit committees, SEC disclosures, and corporate responsibility. Today, we’ll be taking a look at the key features of this landmark legislation.
Title I: Public Company Accounting Oversight Board
One of the most important aspects of the act is the establishment of the PCAOB—a nonprofit corporation that oversees the audits of public companies and issuing accounting standards. The board is composed of 5 members appointed by the SEC.
Title II: Auditor Independence
This title contains provisions that strengthen auditor independence by prohibiting certain non-audit services (such as bookkeeping or financial consulting) from being performed by the auditing firm. In addition, it requires audit committees to pre-approve all audit and non-audit services.
Title III: Corporate Responsibility
This title contains provisions that hold CEOs and CFOs criminally responsible for certifications of financial statements that contain fraudulent information. It also requires senior executives to disclose any material changes in their financial condition and establishes new record keeping requirements.
Title IV: Enhanced Financial Disclosures
This title requires more extensive disclosure of off-balance sheet transactions and pro forma financial information. It also prohibits insider trading and enacted new disclosure requirements for internal control over financial reporting
Title V: Analyst Conflicts of Interests
This title seeks to remove potential conflicts of interest between research analysts and investment bankers by prohibiting analysts from owning shares in companies that they cover and banning compensatory analyst research reports
Title VI: Commission Resources and Authority
This title authorizes the SEC to hire additional staff and contractors, as well as grant rulemaking authority to the Public Company Accounting Oversight Board
The Sarbanes Oxley Act was a much-needed response to a number of corporate scandals in the early 2000s. The legislation contains 11 titles that prescribe requirements for public companies, audit committees, SEC disclosures, and corporate responsibility. The Sarbanes Oxley Act remains an important piece of legislation that has helped to make America’s corporations more accountable and transparent.
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