Sarbanes-Oxley Act

The act, often called SOX, was named after its sponsors, Senator Paul Sarbanes and Representative Michael Oxley. It introduced major reforms aimed at restoring investor confidence.

Key provisions include requiring chief executives and chief financial officers to personally certify the accuracy of financial reports; requiring management to assess, and larger companies’ auditors to test, internal controls over financial reporting; creating the Public Company Accounting Oversight Board to regulate auditors; strengthening auditor independence by restricting non-audit services; requiring independent audit committees; and increasing penalties for fraud.

For example, under the act, a chief financial officer who knowingly certifies false financial statements can face heavy fines and imprisonment.

The act improved the reliability of financial reporting and internal controls, but critics argued that compliance costs, especially for internal control testing, were high, particularly for smaller companies. Some smaller companies are exempt from parts of the requirements. Many other countries introduced similar reforms, sometimes described as their own versions of SOX.