Which of the following are required by the Sarbanes-Oxley Act?
The Sarbanes-Oxley Act, commonly known as SOX, was enacted in 2002 in response to several high-profile corporate scandals. This legislation was designed to protect investors from fraudulent accounting activities by corporations. It introduced a series of requirements that companies must comply with to ensure transparency and accountability in financial reporting. In this article, we will discuss the key requirements imposed by the Sarbanes-Oxley Act.
1. Internal Controls
One of the primary goals of the Sarbanes-Oxley Act is to ensure that companies have effective internal controls in place. These controls are designed to prevent and detect fraud, as well as to ensure the accuracy and reliability of financial reporting. Companies are required to establish and maintain a system of internal controls that is designed to provide reasonable assurance that financial reports are free from material misstatement.
2. Audit Committee
The Sarbanes-Oxley Act mandates the establishment of an independent audit committee within the company’s board of directors. This committee is responsible for overseeing the company’s financial reporting process, including the hiring, compensation, and oversight of the external auditor. The audit committee must also ensure that the company’s internal controls are effective and that the external auditor is independent.
3. Whistleblower Protections
The Act includes provisions to protect whistleblowers who report violations of the law. Companies are prohibited from retaliating against employees who report violations of securities laws, including violations of the Sarbanes-Oxley Act. This provision is intended to encourage employees to report illegal activities without fear of retribution.
4. Financial Reporting
The Sarbanes-Oxley Act requires companies to disclose certain information in their financial reports. This includes the company’s financial condition, results of operations, and changes in financial condition. Companies must also provide a discussion and analysis of their financial condition and results of operations, as well as a description of their internal controls.
5. Certification of Financial Reports
The Act requires the CEO and CFO of each public company to certify the accuracy and completeness of the company’s financial reports. This certification is intended to hold the executives accountable for the accuracy of the financial information provided to investors.
6. External Auditor Independence
The Sarbanes-Oxley Act also addresses the issue of auditor independence. It requires that the external auditor be independent in both fact and appearance. This means that the auditor cannot have any financial interest in the company or its subsidiaries, and cannot provide certain non-audit services to the company.
In conclusion, the Sarbanes-Oxley Act has introduced a series of requirements aimed at improving the transparency and accountability of financial reporting in the United States. By ensuring that companies have effective internal controls, an independent audit committee, and a system of whistleblower protections, the Act seeks to restore investor confidence in the financial markets. Compliance with these requirements is essential for companies to operate in the public domain and maintain the trust of their stakeholders.
