The Sarbanes-Oxley Act of 2002
The Sarbanes Oxley Act, also known as SOX, passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.
Sarbanes–Oxley was named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH). As a result of SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements.
Sarbanes-Oxley Act Whistleblower Protections
- The law requires that all publicly traded corporations create internal and independent “audit comittees.” As part of the mandated audit committee function, publicly traded corporations must also establish procedures for employees to file internal whistleblower complaints, and procedures which would protect the confidentiality of employees who file allegations with the audit committee.
- The SOX Act sets forth new ethical standards for attorneys who practice before the Securities and Exchange Commission (SEC). This law, and the SEC’s implementing regulations, require attorneys, under certain circumstances, to blow the whistle on their employer or “client.”
- SOX amended the federal obstruction of justice statute and criminalized retaliation against whistleblowers who provide “truthful information” to a “law enforcement officer” about the “commission or possible commission of any Federal offense.” This provision of the SOX was not limited in its application to publicly traded corporations; it covers every employer nationwide.
- Section 3(b) of the SOX contains an enforcement provision concerning every clause of the SOX. This section states that “a violation by any person of this Act [i.e. the SOX] . . . shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934.” This section grants jurisdiction to the SEC to enforce every aspect of the SOX, including the various whistleblower-related provisions. It also provides for criminal penalties for any violation of the SOX, including the whistleblower-related provisions.