The Sarbanes–Oxley Act of 2002 popularly known as SOX is a US law that provides stringent rules on the creation and publication of accounts and information relating to public and some private companies in the USA. The modern stocks and securities market is among the most sensitive and dynamic forms of investment. A recent tweet by Elon Musk about the privatization of Tesla evidences how dynamic stock and securities trade is, and why investors need protection from laws (Stewart, 2018). SOX inter alia provides for personal criminal liabilities for directors or accountants who participate in the propagation of misinformation about the financial status of corporations.
SOX is named after US senators Paul Sarbanes and Michael G. Oxley and was enacted by the US Congress in 2002 with near absolute majority votes from both houses, then signed into law by then-President George W, Bush. The law was meant to curb runaway fraud being undertaken by US corporations who presented fictitious or exaggerated accounts to investors. The falsified accounts would influence the investment decisions of investors, leading to losses of billions of shillings when the real status of the companies was discovered (Sarbanes-Oxley Act, 2002). Among the main culprits of such frauds included WorldCom, Enron, and Tyco International. The general idea behind the law is to ensure that the corporate veil would not provide respite for directors who misled the public about the status of their companies (Chhaochharia et al., 2016).
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Among the most important segment of SOX is Article 1, which establishes the Public Company Accounting Oversight Board (PCAOB) (Sarbanes-Oxley Act, 2002). Public accountants are directly involved in the auditing of the accounts of corporations and create the accounts of such organization. PCAOB streamlines public accountants so that their organizations cannot be used to prepare falsified accounts that can present a false narrative about a company to the public. Due to the creation of PCAOB, the public has more confidence in the accounts that are published from time to time about companies.
Another critical segment is Title III that places the corporate responsibility for the publication of company accounts directly on its directors. The segment indicates that directors will be held personally responsible for any false accounts that are published by a company (Chhaochharia et al., 2016). The directors thus have an obligation to check the accounts to ensure that they are in order before they are published. This segment eliminated the propensity by directors to hide behind the corporate veil and evade blame for false accounting.
Further, Title VIII prohibits the destruction of any evidence for crimes that have been committed under the act (Sarbanes-Oxley Act, 2002). The provision is important since establishing guilt for fraud-related crimes is a high bar and it would be easy for guilty parties, who have control over the affairs of a company to eliminate all evidence of their wrongdoing. However, SOX provides that any destruction of evidence is a crime, a fact that will further discourage corporate leaders from participating in the perpetration of fraudulent misrepresentation of corporate accounts.
Finally, Title IX dubbed the White Collar Crime Penalty Enhancement Act of 2002 increased the penalties available for white collar crimes, such as the ones published in SOX (Sarbanes-Oxley Act, 2002). Traditionally, white collar crimes were considered to be benign and of limited impact, hence attracted mild punishment, a fact that encouraged impunity. SOX, recognized the massive adverse impact of such crimes, thus provided for heftier penalties.
In conclusion, SOX was a timely and effective law for the protection of investors in the stock and securities market and maintaining investor confidence in these markets. Under SOX, corporate leaders, more so for public companies were compelled to tell investors the truth about their companies, so that investors can make informed investment decisions.
References
Chhaochharia, V., Grinstein, Y., Grullon, G., & Michaely, R. (2016). Product market competition and internal governance: Evidence from the Sarbanes–Oxley Act. Management Science , 63 (5), 1405-1424
Sarbanes-Oxley Act. (2002). Sarbanes-Oxley Act. US Congress . http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.474.2105&rep=rep1&type=pdf
Stewart, E. (2018, September 19). Elon Musk is now facing a Justice Department probe over his privatization tweet. Retrieved from https://www.vox.com/business-and-finance/2018/9/19/17878344/tesla-probe-elon-musk-investigation-justice-department
