Why It Matters
SOX was the US government's response to corporate fraud scandals that destroyed billions in shareholder value and shook public trust in capital markets. It fundamentally changed how public companies manage financial reporting, making executives personally liable for the accuracy of financial statements. While it's a US law, its impact extends globally — any company listed on US stock exchanges must comply.
Key Sections
Section 302 — CEO/CFO Certification
The CEO and CFO must personally certify that:
- Financial statements are accurate and complete
- Internal controls are effective
- Any significant changes or deficiencies have been disclosed
False certification carries criminal penalties.
Section 404 — Internal Controls
The most resource-intensive requirement:
- Management must assess and report on the effectiveness of internal controls over financial reporting (ICFR)
- External auditors must attest to management's assessment (for accelerated filers)
- Requires documenting, testing, and remediating control deficiencies
Section 802 — Document Retention
Criminalizes the alteration, destruction, or concealment of records with intent to obstruct an investigation. Penalties include fines and up to 20 years imprisonment.
Section 806 — Whistleblower Protection
Protects employees who report securities fraud from retaliation. Whistleblowers can sue for reinstatement, back pay, and compensation.
Section 906 — Enhanced Criminal Penalties
CEO and CFO must certify that financial reports comply with SEC requirements and fairly present the company's financial condition. Willful false certification: up to $5 million fine and 20 years imprisonment.
Who Must Comply
- All companies publicly listed on US stock exchanges (NYSE, NASDAQ)
- Foreign private issuers listed in the US
- Their subsidiaries and affiliates (including international operations)
- Audit firms that audit these companies
SOX and IT
SOX compliance heavily depends on IT systems because financial reporting relies on:
- Access controls — who can modify financial data
- Change management — tracking changes to financial systems
- Audit trails — logging all access to and modifications of financial records
- Backup and recovery — ensuring financial data integrity
- Segregation of duties — preventing single individuals from controlling entire processes
Key Regulation
- Sarbanes-Oxley Act of 2002 (Public Law 107-204)
- PCAOB Auditing Standards — standards for SOX audits
- SEC Rules implementing SOX requirements
- COSO Framework — the most widely used framework for SOX internal controls assessment