Sarbanes-Oxley Act Of 2002 - SOX
DEFINITIONThe Sarbanes-Oxley Act of 2002 (SOX) is an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. The SOX Act was created in response to accounting malpractice in the early 2000s, when public scandals such as Enron Corporation, Tyco International plc, and WorldCom shook investor confidence in financial statements and demanded an overhaul of regulatory standards.
INVESTOPEDIA EXPLAINSThe rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with security regulations. The two key provisions of the Sarbanes-Oxley Act are Section 302 and Section 404.
Section 302 is a mandate that requires senior management to certify the accuracy of the reported financial statement. Section 404 is a requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 has very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls.
In addition to the financial side of a business, such as the audits, accuracy and controls, the SOX Act also outlines requirements for information technology (IT) departments regarding electronic records. The SOX Act does not set forth a set of business practices in this regard but instead defines which company records need to be stored on file and for how long. It does not specify how a business should store its records, only that the IT department is responsible for storing them, according to standards outlined in the SOX Act.
Section 802 of the Act contains the three rules that affect record keeping. The first deals with destruction and falsification of records. The second strictly defines the retention period for storing records. The third rule outlines the specific types of business records that need to be stored, which includes electronic communications.
An Example of SOX ImplementationMany companies have been created to help other organizations comply with the SOX Act. Workiva Inc., for example, is one such company, providing a cloud-based productivity platform that links data and builds internal controls across global enterprises. On June 7th, 2016, Integrated DNA Technologies, Inc. announced that it was using Workiva's Wdesk platform to help it comply with the SOX Act.
While Integrated DNA Technologies is a private company and is not required by law to adhere to the SOX Act, the company said that it wanted to comply and build internal controls in order to provide transparency for its board of directors and internal auditors.