What is Sarbanes-Oxley Act (SOX)?

What is SOX? It is not a baseball team located in Chicago or Boston. It is not a misspelling of that article of clothing that keeps your feet warm and protected.

Rather, it is an acronym that stands for Sarbanes-Oxley Act. SOX is a bill passed in 2002 by Congress intended to promote greater transparency between investors and the corporations they invest in. 


SOX was a reaction against fraudulent accounting practices that happened within a number of corporations in the late 1990’s and early 2000’s. Basically, these companies would “cook the books” or manipulate statements to show the company as more profitable than it actually was. Better numbers elicited further investment which increased the value of the company’s stock. After the misstatements came to light, the stock of the respective company plummeted, creating huge losses for investors. In essence, the problem was that executives were not looking out for the best interest of their stockholders. They were looking for sneaky ways to make a quick buck at the expense of investors and the public.


So how did the Securities and Exchange Commission protect against this risk in the future?


The Sarbanes and Oxley Act had a number of components. The ones that are important to know are the following:

  • Creation of the PCAOB (Public Company Accounting Oversight Board)- this agency is responsible for providing oversight of public accounting firms. Basically the Board defines, or sets a standard, for what a good and thorough audit should look like. They then help public accounting firms reach that standard.

  • Corporate Responsibility- no longer can executives stand at a distance and approve of their reports. Under SOX, executives must take individual responsibility for the accuracy of financial reports.

  • Auditor Independence- auditors must be completely independent of the corporation they’re auditing. This is to limit conflicts of interest. Auditors must meet certain standards, they must rotate audit assignments, and they must meet specific reporting criteria.



Understanding the effects of SOX is a bit like understanding the role of a referee in a football game. The referee is there solely to ensure both teams play by the rules. If everyone plays by the rules, the referee goes unnoticed. But as soon as one team commits a penalty or an act outside the rulebook, then the referee intervenes and sorts the mess out.


There are monetary costs of not being complicit with SOX. Depending on the degree and severity of the crime, penalties can be upwards of 5 million dollars in fines accompanied with 20 years in jail.


In short, it is important to know that all corporations must abide by the rules outlined in Sarbanes Oxley. The main components are listed above, and failure to comply costs a firm in terms of both money and reputation.






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