The Sarbanes Oxley Act of 2002 is a federal legislation passed on July 30, 2002 in the wake of major corporate and accounting failures that cost the investors billions of dollars when stock prices collapsed shaking public confidence in the US capital markets. This legislation is also called Public Company Accounting Reform and Investor Protection Act of 2002.
This Sarbanes Oxley Act has raised standards for compliance and reporting for the boards of all US public companies listed on any US stock exchange, their management and public accounting firms. It does not apply to privately or closely held companies. The Act covers different matters ranging from provisions for enhanced corporate responsibilities to increased criminal penalties. The Act also seeks to strengthen corporate accounting control mechanisms.
The Act has set up a quasi public agency, the Public Company Accounting Oversight Board charged with monitoring and disciplining accounting firms in their function as auditors of public companies. This Act also addresses contemporary issues in corporate management like good corporate governance, independence of the auditor, enhanced financial disclosure norms and internal control assessment.
Section 404 of the Act mandates the company management and the external auditor to report on the adequacy of the company’s internal control over its financial reporting. This is an expensive and burdensome proposition for the companies. That is why section 404 is the most contentious part of the legislation.
The undesirable side effect of Sarbanes Oxley Act of 2002 is also manifest in burdensome nature of the Act due to its stringent and rigorous conditions that have forced many small US companies and foreign companies to deregister from the US stock exchanges.