Sox - Brief Overview

Sarbanes - Oxley Act, 2002

Created due to corporate scandals

In its reaction to corporate financial scandals including Enron, Arthur Andersen and many other companies, Congress passed the Sarbanes-Oxley Act of 2002.

Purpose

Sarbanes Oxley is designed to "protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws."

In brief

SOX provides for the following :

- Higher levels of auditor independence

- Personal accountability for CEOs and CFOs

- Increased criminal and civil penalties for securities violations

- Increased disclosure regarding executive compensation

- Stricter provisions on Insider trading

- Certification of Internal audit work by External Auditors.

Impact on all publicly traded companies

Every publicly traded company in the U.S. has to comply with SOX irrespective of their size. All the International companies listed in U.S. also have to comply with SOX.

International environment mismatch for SOX :

SOX compliance from foreign countries is a very debatable topic. Some countries simply are not at those levels of audit procedures and hence the environment for SOX is not conducive.

On the other hand, it can be understood that such companies need not be listed on the US stock exchange as the investors cannot be sure of governance practices in these companies.

High expense for small scale companies :

One drawback of this has been that lot of companies are becoming private because of not being able to cope with the SOX expenses. Many companies that were listed were of smaller sizes and SOX expenses amounted to about 5-6% or more of their revenues. Positive aspect of this was that the 'mom n pop shops' that were public and their purpose of being public was not justifiable have gone back to being private.

Detail on important changes made by SOX

1.