The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to major accounting scandals (Enron, WorldCom) to improve the accuracy and reliability of corporate disclosures and strengthen corporate governance.
Key provisions:
Corporate governance: - CEO/CFO certification: Executives must personally certify the accuracy of financial statements (Section 302 and 906). False certifications = criminal penalties. - Audit committee independence: Public company audit committees must be entirely independent directors; at least one must be a "financial expert." - No loans to executives: Prohibits personal loans from companies to their directors or executive officers.
Accounting oversight: - PCAOB created: Public Company Accounting Oversight Board — oversees public company auditors. - Auditor independence: Audit firms cannot provide certain consulting services to audit clients. - Mandatory auditor rotation: Lead audit partner must rotate every 5 years.
Whistleblower protections: Employees who report fraud to SEC or Congress are protected from retaliation; civil penalties for retaliation.
Document retention: Knowing destruction of documents related to a federal investigation is a criminal offense.
Criminal penalties: CEO/CFO false certification: up to 10 years/$1M (civil), 20 years/$5M (willful). Securities fraud: up to 25 years.
> Exam tip: SOX is tested lightly on the Series 7 and 65/66. Key facts: PCAOB oversees public company auditors; CEO/CFO personally certify financial statements; audit committee must be independent.