05 Jan 2022 Ankit Chadha

Sarbanes Oxley Act Explained: Definition, Provisions and Purpose

SOX Oxley Act | TRC Corporate Consulting

The SOX Oxley Act is a United States law designed to safeguard investors by prohibiting false accounting and financial practices at publicly traded corporations. SOX Oxley Act was enacted in 2002 in response to a slew of corporate scandals and the breaking of the dot-com bubble, and it established several reporting, accounting, and data retention regulations to ensure that big firms' business activities remained above board.

Whereas many SOX Oxley Act rules deal with financial and accounting issues, correctly handling corporate data is at the heart of many parts of how the legislation operates—and this has a significant impact on IT as well.


What is SOX Compliance?

SOX Compliance entails aligning your company's practises to all the regulations mentioned in the sox compliance checklist outlined below:

CEOs and CFOs must handle financial reporting and internal controls.

  • CEOs and CFOs must handle financial reporting and internal controls.
  • An internal control report must be written that examines the company's controls objectively.
  • Formal data security policies must be written and continuously implemented, as well as a data security strategy.
  • All phases in the compliance process must be recorded and documented regularly.

All of this necessitates a significant amount of effort on the side of businesses, and many seek assistance in doing so. The Committee of Sponsoring Organizations of the Treadway Commission, or COSO, was founded in 1985 to aid in the fight against corporate frauds and has long maintained a framework for internal controls that businesses can use to execute effective anti-fraud practices.

SOX Oxley Act Mandates

There are many laws to consider, therefore, you need to go over them thoroughly to understand the exact obligations they impose. However, here's a high-level description of what the legislation mandates that's worth remembering from a wider perspective.

SOX Control

SOX Control is the mechanism by which SOX Oxley Act regulations are applied within a company. In this sense, a control is an internal regulation designed to avoid or detect errors or wrongdoing during the financial reporting cycle.

SOX Control must be applied throughout a corporation, according to SOX Oxley Act. The article provides some concrete examples of the kind of rules that would be looked into as part of a SOX Audit:


Data backup: Financial records must be backed up offsite according to legal requirements.

Physical access: Physical access to your offices and paper files, as well as electronic access to your data, will be governed by guidelines. The law stipulates a least permissive access approach, in which employees have access just to the extent necessary to perform their tasks, but no more.

Security: You'll need a set of rules to show that you've taken steps to secure your data against breaches. However, the implementation is up to you within appropriate limits.

Change management: You'll need to have procedures in place for adding, modifying, and adding new users to the databases and software that manage your company's funds.

Major Provisions of SOX Oxley Act of 2002

The SOX Oxley Act provisions are divided into numbered sections. Let's take look at the most important sections of the act:

Section 302: Public corporations are required to file reports with the Securities and Exchange Commission regularly. Top executives are accountable for creating internal data controls and personally vouching for the information contained in these reports.

Section 401: The accuracy of financial statements is necessary. Any off-balance liabilities, transactions, or obligations should be represented in the financial statements.

Section 404: Annual financial reports must include a segment on internal controls that evaluate their efficacy and any flaws detected in the controls. Registered external auditors must back up management's assessment of internal controls.

Section 409: Companies must report any significant changes in their financial condition or activities, such as acquisitions, divestments, or big personnel exits, as soon as possible. The modifications must be conveyed straightforwardly and unambiguously.

Section 802: This section contains the three records-keeping rules. The first is about record deletion and deception. The second specifies the length of time that keeping records would take. The third rule specifies the kind of corporate records that must be kept, including electronic communications.

Sections 906: This section is similar to 802 as both of these sections 802 and section 906 deal with penalties. It makes it a criminal activity for anyone to certify a deceptive or fraudulent financial report, as well as tampering with records to obstruct an investigation.

SOX Oxley Act's Purpose

The SOX Oxley Act was enacted in response to a series of incidents around the turn of the century. Several publicly traded businesses employed accounting gimmicks, shell corporations, and other deceptive tactics to hide economic losses from the public and artificially inflate stock prices.

When the deception could no longer be sustained and the stock price collapsed, executives and board members cashed out, leaving investors holding the bag.

Though none of the early-stage internet businesses committed fraud, many individuals suspected that they had overstated reports of their earning potential in anticipation of initially profitable IPOs, ultimately benefiting company founders at the cost of investors.

To prevent such abuses from happening again, the Sarbanes-Oxley Act placed a hefty regulatory burden. The law intends to improve business conduct by requiring corporations to create and retain accurate financial data and make that data available to investors and authorities in the coming years.

Benefits of SOX Compliance to Investors

Financial crime and accounting frauds have been far less common since the SOX Oxley Act implementation. Organizations were discouraged from inflating critical numbers like revenues and net income. The cost of being discovered by the Securities and Exchange Commission (SEC) has outweighed the possible benefit of taking liberties with the presentation of financial documents. Hence, investors had access to more comprehensive and dependable data, allowing them to base their investment assessments on more representative data.

Penalties under the SOX Oxley Act

Sarbanes-Oxley fines can be severe—and, more crucially, they apply to individuals in positions of authority within corporations, not simply to the companies as a whole. While corporate leaders who sign off on erroneous reports may face penalties, wilful fraud receives the harshest punishment.

The SOX Oxley Act of 2002 provides standards for information technology (IT) departments involving electronic records, in addition to the financial side of a firm, such as an accuracy, SOX audit, SOX Compliance Checklist, and SOX controls.

We, at TRC Corporate Consulting have a team of professionals, who have years of hands-on experience and extensive knowledge about SOX compliance. Moreover, they stay updated with all the amendments in regulations and devise plans to implement them effectively in your organization, thus helping your organization comply with all the regulations successfully. Our professionals help your organization with every step of the process, from SOX audits to other SOX requirements. To learn more about our services, contact us now

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