Short definition: The Sarbanes-Oxley Act (SOX) is a U.S. federal law enacted in 2002 to protect investors from fraudulent accounting practices and improve corporate governance.
Explanation: SOX was passed in response to major accounting scandals like Enron and WorldCom. It established stricter regulations for publicly traded companies and their auditors, aiming to improve transparency and accountability in financial reporting. The act mandates internal control assessments, CEO and CFO certifications, and increased oversight of auditors.
Example: Under SOX, CEOs and CFOs are personally responsible for the accuracy of their company’s financial statements and must certify their compliance with financial reporting requirements.
Additional information (optional): SOX has had a significant impact on corporate governance and financial reporting practices in the United States and has influenced similar regulations in other countries. While some critics argue that SOX has increased compliance costs for companies, its proponents believe it has played a crucial role in restoring investor confidence and promoting ethical business practices.