Dear All,
The term for the day is Sarbanes Oxley Act, 2002 popularly known as SOX. I am sure everyone of you has heard this term earlier, but may not be fully aware of the background and scenario in which it was enacted in the USA. Let us know something more about the Act today. Though there are many aspects to it, I will post only a few of them here.
The Act was enacted as a reaction to a number of major corporate and accounting frauds including Enron and WorldCom in the USA. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the securities markets of USA and questioned the role of the external auditors in the corporate world.
This Act set new standards for the Boards of all US public companies, managements and public accounting firms. It does not apply to privately held companies. The act contains sections ranging from additional corporate board responsibilities to criminal penalties. It created a new agency in the USA, known as the Public Company Accounting Oversight Board charged with overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
The Act lays heavy responsibility on the persons signing the financial statements for establishing and maintaining internal controls. It also requires the disclosure of all material off-balance sheet items in the financial statements. The most debated aspect of SOX is Section 404, which requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls requires enormous effort. For violating this Act, a harsh punishment of fine or imprisonment for 20 years, or both, is prescribed. Since this Act applies to all public companies in USA, an important implication from the Indian perspective, is that all Indian companies having securities listed on US exchanges have to comply with this Act. Therefore, ICICI Bank, Infosys etc having ADRs listed on NASDAQ do comply with this Act.
For further information on SOX visit http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act
Regards,
CA Rahul Joglekar
Partner
Gokhale & Sathe
Chartered Accountants
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