The Sarbanes- Oxley Act - A brief introduction

Research Paper (undergraduate), 2007

8 Pages, Grade: 1,3




1. Introduction

2. Aims and general measures of the Sarbanes- Oxley Act

3. Provisions of the Sarbanes- Oxley Act

4. Criticism on the Sarbanes- Oxley Act



This paper provides a brief but complete introduction of the Sarbanes- Oxley Act (SOX). After providing the aims that were pursed by the United States legislation by introducing this act, the paper gives an overview of the provisions of the Sarbanes- Oxley Act.

This overview deals with every single provision and describes the inherent measures.

Ultimately the last section of this paper delivers an overview of the criticism raised by different scholars and experts concerning the Sarbanes- Oxley Act.

1. Introduction

On July 20, 2002, in the aftermath of important and far-reaching accounting fraud scandals, US- President George W. Bush signed a law which ultimately was the most crucial securities legislation since the Securities Exchange Act in 1934 which founded the Securities Exchange Commission (SEC).[1]

The official title of the law is “An Act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.”[2] But generally the act is cited as the Sarbanes- Oxley Act (SOX), named after the two main architects of the law, US- Senator Paul Sarbanes and US- Representative Michel Oxley.[3]

The provisions of the Sarbanes- Oxley Act are mandatory to every public company that is listed on US capital markets. Therefore also foreign company that want to access the US capital markets are subject to the Sarbanes- Oxley Act.[4]

On the following pages, the aim and the general measures of the Sarbanes- Oxley Act will be described. Moreover, the most important provisions of the different titles of the Act will be pointed out. Ultimately, some of the most import implications and criticism concerning the Sarbanes- Oxley Act will be described.

2. Aims and general measures of the Sarbanes- Oxley Act

The aim of the Sarbanes- Oxley Act is to ensure that investors can rely on financial figures and data that are published by public companies.

Therefore the Sarbanes- Oxley Act re- arranges the responsibilities and liability of company managers and executive directors. Moreover the act tightens the liability of public company auditors and it sets higher standards for the published financial figures in company disclosures and annual reports. In addition to that the Sarbanes- Oxley act contains a precise definition of the relationship between the auditor and its client, the public company. Last but not least the SOX established a new board to oversee accounting and auditing firms, the Public Company Oversight Accounting Board (PCOAB).[5]

3. Provisions of the Sarbanes- Oxley Act

In the following paragraphs the most crucial provisions of the Sarbanes- Oxley Act will be pointed out.

Title I of the Sarbanes- Oxley Act established the Public Company Oversight Board (PCOAB). The PCOAB is a new supervision board to oversee public accounting and auditing companies in the United States. The PCOAB consists of five members which are appointed for five year terms. These members must be independent and are therefore not allowed to receive payments by accounting companies- regular payments like pensions are excluded. According to Section 107 of the SOX, the Security Exchange Commission (SEC) is the regulating authority of the PCOAB. All accounting and auditing firms must registered at the Board and are otherwise not allowed to audit public companies.[6]

The auditor’s independence is regulated in Title II, Sections 201 to 209 of the SOX. Most crucial here is Section 201 which makes it illegal for auditing firms to provide any further service to their client than auditing. These services include bookkeeping, the design and implementation of financial information systems, services to outsource internal audit, management or human resources services, investment banking services and legal advisory services.

Moreover Section 203 regulates the rotation of the auditors and their contact persons in the client company every five years. The auditor’s independence is also ensured by Section 206 of the SOX, as this section interdicts the employment of the Chief Executive Officer, the Chief Financial Officer or controllers of the client company by the auditing company within the next year after the audit.[7]

Title III of the Sarbanes- Oxley Act is about company responsibility. Every company has to set up an audit committee. Each member might be a member of the board or has to be independent. That means that the member of the committee does not receive consulting or advisory fees from the audited company. The audit committee is responsible for organizing the audit process and is the contact committee for the audit firm.

According to Section 302, the Chief Executive Officer and Chief Financial Officer of the company have to testify the appropriateness of the financial statements and disclosures. This enhances their liability about the correctness of the published financial figures.

Another import aspect of Title III is that according to Section 303 it is illegal to mislead, influence or manipulate the auditor in any way.[8]


[1] compare (slide 2)

[2] see Sarbanes Oaxley Act at (p.1)

[3] compare

[4] compare (slide 2)

[5] compare

[6] compare (Section 101- 109)

[7] compare (Sections 201- 209)

[8] compare (Sections 301- 308)

Excerpt out of 8 pages


The Sarbanes- Oxley Act - A brief introduction
Financial Management
Catalog Number
ISBN (eBook)
File size
363 KB
Sarbanes-Oxley Act, SOX, SOA, Corporate Governance, United States law, financial management, financial discloures
Quote paper
Andreas Bauer (Author), 2007, The Sarbanes- Oxley Act - A brief introduction , Munich, GRIN Verlag,


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