SOX compliance refers to the Sarbanes-Oxley Act of 2002, enacted into federal law by the United States Congress as a reaction to corporate accounting scandals. The most notorious of these was the bankruptcy of Enron in 2001. Many of Enron’s stock holders lost their fortunes after investing heavily when the company claimed revenues topping more than $100 billion in the preceding year. These figures were obtained using rather creative, some would say unscrupulous, accounting practices. Corporate executes were able to escape relatively unscathed as a result of purported insider trading.
The SOX Act hopes to prevent another Enron-style scandal in the future by requiring corporate officers to assume personal responsibility for the accuracy of their financial reports. The Act also provides for enhanced disclosure of financial information, including disclosure of off-balance-sheet transactions and the private stock transactions made by corporate officers. Some portions of the act spell out more clearly the definition of certain types of corporate crime under federal law. Title IX of the 2002 SOX Act also provides stiffer punishments for white collar crime. Title VIII and XI deal with fraud accountability. The end goal of SOX compliance is to ensure that public investors know the true condition of the company they are investing their money in and protect the national economy.
SOX compliance is overseen by the Public Company Accounting Oversight Board. It is a non-profit corporation that oversees the auditors of publicly traded companies. They maintain a registry of accounting businesses that are certified as corporate auditors and conduct regular inspections of companies included on their registry. Violations of SOX protocols are justification for levying a fine of up $100,000 on the individual auditor and up to $2 million against the audit firm found in violation. Companies that have been found in violation of SOX compliance protocols may be forced to report to the SEC and their stock holders.
Privately held companies do not need to concern themselves with SOX compliance. It applies only to companies that are publicly traded on the stock market or those with plans to go public in the near future. However, many of the standards corporations must meet to ensure SOX compliance for financial accounting are good best practices for any business.