How To Avoid Sarbanes Oxley Act Violations

The Sarbanes-Oxley Act of 2002 (SOX) is a U.S. federal law that was enacted in response to the corporate scandals of the early 2000s. These scandals, which involved companies such as Enron and WorldCom, led to the loss of billions of dollars in shareholder value and shook public confidence in the stock market. Because of this, it is now more important than ever to monitor for sox violations.

SOX was designed to protect investors by creating new standards for all public company boards, management, and public accounting firms. Among other things, SOX requires that companies maintain accurate financial records, disclose any material off-balance sheet arrangements, and establish internal controls to prevent fraud. SOX also created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of public accounting firms.

The Goal of SOX

The goal of SOX is to restore investor confidence by increasing transparency and accountability in the financial reporting process. SOX sets forth strict rules and regulations that publicly traded companies must follow to achieve this goal. Violating these rules can result in heavy fines and even jail time. As a result, most companies take their compliance with SOX very seriously.

SOX compliance can be costly, both in terms of money and time. Companies must invest in new processes and systems to comply with the law. They also need to train their employees on these new procedures. For some companies, the cost of compliance is a significant burden. However, most companies believe that the benefits of SOX outweigh the costs.

The Components Of SOX

SOX consists of 11 sections, or titles, that address different aspects of corporate governance. Some of the key provisions include:

  • Requiring all public companies to establish an internal control framework
  • Prohibiting insider trading
  • Establishing new responsibilities for audit committees
  • Requiring enhanced financial disclosures
  • Imposing stricter penalties for fraud

The act also created the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing of public companies. The PCAOB is a nonprofit corporation governed by the Securities and Exchange Commission (SEC).

Public companies must disclose their internal control framework in their annual report to ensure compliance with SOX. They must also obtain an independent audit opinion on their internal controls from their auditors. If a company’s internal controls are deficient, it must disclose that deficiency in its filings with the SEC.

How To Avoid SOX Violations In Your Company

The penalties for violating the Act can be severe, so companies need to do everything they can to avoid violations. 

Here are five ways to avoid Sarbanes Oxley Act violations:

Implement Internal Controls

One of the key provisions of the Sarbanes Oxley Act is the requirement that companies implement internal controls to prevent and detect fraud. Internal controls should be designed to address specific risks that are unique to your company. There are many different types of internal controls, but some common examples include separation of duties, dual approval requirements, and physical custody over assets.

Keep Accurate Books and Records

Another key provision of the Sarbanes Oxley Act is that companies keep accurate books and records. Accurate books and records are essential for adequate internal controls. If your books and records are inaccurate, it will be difficult, if not impossible, to design and implement adequate internal controls.

Comply With SEC Regulations

The Sarbanes Oxley Act also requires companies to comply with all applicable SEC regulations. The SEC has a variety of rules and regulations that apply to publicly traded companies, so companies must ensure that they comply with all relevant laws. Some standard SEC regulations that apply to publicly traded companies include the reporting requirements under the Securities Exchange Act of 1934 and the proxy rules under the Securities Exchange Act of 1934.

Cooperate With Government Investigations

If your company is the subject of a government investigation, it’s essential to cooperate with the investigators. The Sarbanes Oxley Act requires companies to cooperate with government investigations and will monitor for sox violations for potential violations of the act. Failure to cooperate with an investigation can result in severe penalties, including fines and jail time.

Seek External Guidance

The Sarbanes Oxley Act is complex, and complying with all of its provisions can be challenging for even the most experienced compliance officers. If you need help ensuring that your company complies with the act, seek external guidance from a qualified lawyer or accountant familiar with the act’s requirements. 

Final Thoughts

The Sarbanes Oxley Act imposes strict rules and regulations on publicly traded companies to prevent fraud and improve corporate governance. The penalties for violating the act can be severe, so companies must do everything possible to avoid violations. By implementing internal controls, keeping accurate books and records, complying with SEC regulations, cooperating with government investigations, and seeking external guidance, you can help ensure that your company avoids violating the act.

Written by Spencer Calvert