Also known as SOX and SarbOx, 18 U.S.C. §1514A was enacted in the wake of a series of U.S. accounting scandals to both increase management’s liability for false accounting and inaccurate reporting and to impose meaning quality standards on public company’s internal controls. Much of the legislation, and the record-breaking number of rules promulgated by the SEC in implementing the act, addressed the increasing lack of independence perceived in the activities of public accountants.
SarbOx has been heavily criticized in some quarters for the burden it places on companies, though others have suggested that there are some tangible benefits to improved internal controls. Section 302 of the Act requires the company to certify the accuracy of its quarterly financial reports and certain company officers (CEO and CFO) to certify that financial reports that, in addition to personally reviewing all financial reports, the reports present a fair and truthful picture of the company’s finances. Further, Section 302(a) requires that the signing officers establish, maintain, periodically review and report changes, deficiencies, and corrective actions in the effectiveness of the corporate internal controls necessary to provide financial reports that comply with these requirements.
Section 404 establishes a requirement for companies to state in their public annual reports the responsibility of corporate management to establish and maintain such internal controls as are necessary to provide financial reports that comply with the Act’s requirements and also that the external auditors also provide an assessment of the effectiveness of the company’s internal controls.