Sarbanes-Oxley Act was approved by President George Bush on 30 July 2002 and was later also approved shortly thereafter by the U.S. Congress. It gets its name from its two authors: Paul Sarbanes, Senator for the State of Maryland and Michael Oxley, a member of the U.S. Congress for the Republican Party. The law is often referred to colloquially to SOX or Sarbox.
College students preparing their research papers on the topic must know that Sarbanes-Oxley Act came into being as a reaction to the large corporate bankruptcies that shook American business around the turn of the millennium. The most famous was the bankruptcy of the energy company Enron in autumn 2001 when a large number of employees lost their paid-up pension savings and the shareholders lost their invested money. However, this was not the only example, as also the telecommunications company WorldCom, Tyco International, Adelphia, and Italian dairy group Parmalat may be mentioned.
Sarbanes-Oxley Act, also sometimes with extensions 302 and / or 404 (in terms of different sections in the text of the law and those that have the greatest impact for the companies covered by the Sarbanes-Oxley Act), aims to strengthen the internal control over financial reporting. This simply means that it will be more difficult to deceive the stakeholders that in one way or another have invested money in the company, for example through fraud, false information to shareholders and investors. This is also done through testing the Company’s internal control.
What is it that makes investors, employees, and other interested parties to expect that a company become compliant is a more secure investment than a company that does not become compliant? There are several reasons; one of these is Section 203, which sets the requirement that external auditors should be replaced at least every five years.
Another is under Section 301, which sets the requirement for the formation of so-called Audit Commitees within companies. Audit Committee will work together with the external auditors to ensure that they receive all necessary information required to make a proper job.
Sarbanes-Oxley Act covers all the companies listed on the U.S. stock exchanges, such as NASDAQ, the American Stock Exchange (Amex) and the New York Stock Exchange (NYSE) or have bonds issued in the U.S. market and have at least 300 American owners. This means that even European companies covered by the Act; Ericsson, ABB, Swedish Match and SKF are some of these.
Many European companies have been forced to put up new departments to cope with the demands of the law that has received a lot of praise but also has been criticized for being too bureaucratic and cause excessive costs for companies that already work with the European Companies Registration Code and the International Financial Reporting Standard (IFRS).
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