What is SOX Compliance? The acronym ‘SOX’ stands for the Sarbanes-Oxley Act. This act was introduced into United States federal law in 2002 and implemented in 2005 to protect investors from fraudulent activities, such as known accounting errors or outright deceit, by requiring greater oversight on financial reporting and auditing than ever before.
What does this mean for businesses and business owners? All publicly held companies within the United States must abide by these stringent laws designed to restore investor confidence in the stock market following several highly publicized corporate accounting scandals between 2000 and 2002. Businesses whose annual revenue is $5 million or more (or equivalent) must comply with this legislation.
The main goal of SOX compliance is to ensure that companies are creating and reporting accurate financial statements for public review. This means that all companies, whether they are publicly traded or privately held, must not only release detailed financial reports but ensure that these reports adhere to the strict standards outlined by SOX legislation. This SOX compliance guide can help you understand what SOX compliance is and how you can ensure your business is complying with all applicable laws.
What legislation is involved?
The two main principles behind SOX compliance are transparency and accuracy. With these principles in mind, this legislation sets out several mandates regarding the preparation of financial statements and regular audits (at least once per year) conducted by an independent auditing company with no previous affiliation to the business being audited.
This legislation also requires companies who release their financial data publicly to file quarterly reports detailing any changes or corrections made after initial filings were sent out.
Why is SOX legislation important?
Transparency and accuracy are two of the main concerns behind this legislation. With a clear framework that outlines exactly what is required to remain in compliance with SOX, business owners can rest assured that their financial data is being released. Compliance also ensures that there are no chances of misrepresentation or omission of information that could mislead investors and other interested parties.
Though it was not the only regulation introduced in response to corporate wrongdoing, it is widely considered one of the most powerful pieces of anti-fraud legislation ever passed by Congress. The nine provisions included within SOX primarily focused on increasing oversight within all accounting functions (including internal controls), including:
Establishment of standards for external auditor independence
Requiring the CEO and CFO to sign off on all public company disclosures. Auditors must be changed every five years or less. CEOs and CFOs must report any time they change financial position, such as a sale of assets or a personal bankruptcy filing.
Increased protection from whistleblowing
Protections from criminal liability for corporate officers and employees who voluntarily disclose when they believe financials are being misrepresented.
Requiring CEOs and CFOs to report their conflicts of interest in annual reports, which detail all incentive-based or retirement benefit plans, including all stock options issued in the past five years. These disclosures must be made within one month of receiving them.
Extend protection to whistleblowers by prohibiting retaliation against employees who report misconduct or refuse to violate rules relating to public companies. The legislation also mandates that employers provide a two-year statute of limitations following an alleged violation before termination can occur for this reason.
While this legislation was originally intended for publicly traded companies, it is now being applied to organizations of all types and sizes. This means that businesses large and small must adhere to the same standards when reporting any information about their company’s finances.
Auditors are required by law to report on their findings directly to investors if significant deficiencies are discovered within a corporation’s internal control structure. If these problems are not remedied promptly, public trading can be suspended until corrections have been made.
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