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The Sarbanes-Oxley Act of 2002 was passed in response to the notorious Enron Scandal. The goal of the Act is to provide greater corporate governance for financial accounting and executive-level insider knowledge in order to protect the public, a company's employees and its investors. Ultimately, the Sarbanes-Oxley Act provides for greater oversight of corporations through the creation of 11 "titles" applicable to all publicly-traded organizations.
Title I: Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board is established to ensure that Sarbanes-Oxley guidelines are followed. The board reports on corporate governance and prosecutes those who violate Sarbanes-Oxley provisions. In 2010, a change to the Sarbanes-Oxley Act allows the President of the United States to remove, or replace, members of the board as necessary.
Title II: Auditor Independence
This title explains the services an auditor may perform while remaining independent from any conflict of interests. This is called the "auditor independence" provision. Simply put, it prevents an individual with personal interest in the outcome of an audit from performing the audit.
Title III: Corporate Responsibility
This title operates on the belief that the governing board of a corporation should be responsible for the financial reports of the organization. Essentially, it prevents senior management from claiming ignorance if fraud does occur. This title establishes the need for audit committees within an organization and outlines the responsibilities of executives to oversee accounting. It also mandates executives provide sufficient notice prior to a "blackout period" when employees will not be able to change their 401k options. Blackout periods occur during company restructuring, and they are still legal, but employers must now provide notice.
Title IV: Accuracy of Disclosures
This title prevents any conflict of interest between analysts in the investment research and investment banking divisions of two companies. Essentially, it establishes potential areas of conflict of interest between investment analysts and publicly traded companies. Analysts may not receive preapproval of their research and recommendations to investment banking firms by anyone working directly for the company.
Title V: Supporting the Commission
This title provides various resources to support the commission's work including the publication of regular studies on accounting firms, ratings agencies and investment banks.
Title VI: Corporate Malfeasance
Any firm previously involved in a fraud lawsuit or accused of malfeasance will be subject to scrutiny in the future according to Title VI.
Title VIII: Corporate and Friminal Fraud Accountability Act of 2002
This title is specifically named because it is the title used to prosecute anyone violating the provisions set out in Sarbanes-Oxley. It describes the exact legal ramifications for anyone involved in corporate fraud according to the act.
Titles V-XI: Corporate Fraud
The final three titles in the Sarbanes Oxley Act all pertain to the responsibilities a company has to report its own taxes and avoid corporate fraud. They are less concerned with the way a company interacts with the public. While previous provisions are concerned with internal behavior, these provisions outline the requirements on executives and corporations to engage in ethical, lawful business externally.
