Sarbanes Oxley and Corporate Governance

Sarbanes Oxley and Corporate Governance

After a couple of years of corporate scandals in the public sector involving corporate governance and disclosure, the Sarbanes Oxley Act (also known as Sarbox or SOX) was passed in July, 2002. This law has had a lasting effect on the way businesses run and regulate themselves, especially when it comes to financial disclosure, auditing, and reporting.

What Did the Sarbanes Oxley Act Do?

The primary purpose of the Sarbanes Oxley Act was to reduce corporate corruption and promote transparency to investors. Some of the specific areas the law focused on were:

  1. Bolstering auditing committees
  2. Improving disclosure
  3. Making directors and officers liable for financial statement accuracy
  4. Performing and reporting on internal controls tests
  5. Establishing stricter penalties for securities fraud

The measures set in place covering these aspects of corporate governance have had some enduring results on businesses throughout the nation, some of which were rather costly. Nevertheless, it has allowed investors to have more confidence in companies by preventing fraud.

Impact of the Law

The business-side impacts of SOX include specific measures for internal corporate structures, namely auditing committees. Other effects include changes to internal controls, disclosure, and reporting.

Auditing committees: Auditing committees within a company must operate in a certain way in order to comply with SOX. One requirement is that the committee be separate from the top-level management in the company, which in essence holds managers accountable for their actions. The committee also has additional responsibilities, including overseeing external auditors and taking complaints regarding current practices.

Internal controls: To make sure the company polices itself effectively, Sarbanes Oxley requires that companies perform extensive tests on internal controls. This is easiest for companies that have these controls handled by automated systems and the most costly for those who do not. In essence, this makes it highly important to make these controls as efficient as possible while ensuring they are fully effective.

Disclosure: The reporting of financial activities in the company is made much more prevalent by this law, requiring reports on stock transactions, pro forma statements, and material off-balance sheet arrangements.

Management liability: SOX requires top-level managers to certify the accuracy of their reports, thus landing any liability for inaccuracies squarely on their shoulders. If a manager knowingly certifies a false report, he or she can face heavy consequences, including a decade or two in prison. Profits made from fraudulent investments could also be forfeited.

These changes, along with heavier penalties for fraud, make proper corporate governance and internal structuring much more important when it comes to ensuring the success and integrity of your company.

Corporate Governance and Structures Planning

Keeping up with these requirements is key to preventing fraud and avoiding its corresponding legal consequences. However, you also need to make sure everything within your company is handled in a way that functions efficiently. Skilled corporate lawyers can help you through the process of structuring your management to allow efficient and fully compliant operation. For assistance in making sure you’re fully compliant with Sarbanes Oxley, contact Hart & David today.

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