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Financial Statement Audits, Reviews, Compilations

  1. Sarbanes Oxley
  2. Assurance
  3. Engagement Letter

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Sarbanes-Oxley (SOX) Act of 2002: Definition & Overview

Updated: November 23, 2022

There is a lot to consider when it comes to reporting financials for your business. These can include compiling the balance sheet, income statement, and profit and loss statement. It’s incredibly important to provide accurate and relevant details for financial reporting. 

But even though many follow the rules and regulations, there can sometimes still be companies that are not fully truthful. This is why the Sarbanes-Oxley Act was passed by the United States Congress. Read on to learn everything you need to know about the SOX act. 

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    • The Sarbanes-Oxley (SOX) Act of 2002 was put into place after a series of corporate financial scandals that were highly publicized. 
    • The act included a wide range of new penalties and punishments for those that violated securities laws. 
    • There were new rules for corporate officers, auditors, and accountants outlined in the act and there was a demand for more accurate and stringent record keeping. 

    What Is the Sarbanes-Oxley (SOX) Act?

    The Sarbanes-Oxley (SOX) Act of 2002 was passed by the United States Congress into law to cut down on corporations that took part in fraudulent financial reporting. The act was passed on July 30 and its main intention is to protect investors.

    It’s regularly referred to as the SOX Act of 2002, and it includes strict reforms to previous securities regulations. By mandating these reforms, lawbreakers were now subject to stricter and tougher penalties. 

    In the early 2000s, there were more and more financial scandals taking place by public traded companies. Some of the most notable companies worth mentioning are Tyco International plc, WorldCom, and Enron Corporation. 

    Once these scandals became public, they completely shook investor confidence which led to a distrust of some of the corporate financial statements in question. Ultimately, the high-profile frauds required an overhaul of the regulatory standards that had been in place for decades.

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    Benefits of the Sarbanes-Oxley Act 

    With investor confidence falling to an all-time low, there needed to be a complete reform of previous securities regulations. It was more apparent than ever that the regulations had become outdated. 

    Through the Sarbanes-Oxley Act, there became a series of amendments and changes to the existing laws in place that dealt with security regulation. This included the Securities Exchange Act of 1934, as well as a range of laws enforced by the Securities and Exchange Commission (SEC). 

    By taking on this reform, the new laws created the following benefits for financial securities: 

    • New protections 
    • Accounting regulation and internal accounting controls
    • Increased criminal punishment 
    • Corporate Governance and Responsibility 

    With these changes comes better, more accurate, and more reliable financial practices, which ultimately benefit companies and their stakeholders. 

    Major Provisions of the Sarbanes-Oxley (SOX) Act

    Since the Sarbanes-Oxley Act is a piece of legislation, it’s an incredibly long and complex document that includes several key areas. However, there have been three such key provisions, and they’re referred to by their individual section numbers.

    They are Section 302, Section 404, and Section 802. Let’s take a closer look at each.

    Section 302 of the Sarbanes-Oxley Act

    In this section, it mandates that all of the senior corporate officers must certify, personally and in writing, that the financial statements of the company comply with SEC disclosure requirements. 

    It also outlined that at the time of the financial report, it must present in all material the financial condition and results of operations of the issuer. 

    If a corporate officer signs off on the financial statement and they know that it isn’t accurate, they are then subject to a range of criminal penalties which includes prison terms. 

    Section 404 of the Sarbanes-Oxley Act

    This is the section that mandates the use of internal controls and reporting methods. Management and auditors must do this to ensure the controls are accurate and adequate. 

    It’s been argued that the requirements of Section 404 negatively impact public companies. This is because it can be an expensive process to create and maintain the internal controls and reporting methods that are required. 

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    Section 802 of the Sarbanes-Oxley Act

    This section includes three distinct rules that relate to the importance of record keeping. The first outlines the details of the falsification and destruction of records. The second outlines how long records must be retained and stored. And the third describes and outlines the types of business records a company must store, and this includes electronic communications. 

    Sarbanes-Oxley Act Requirements 

    It was mentioned above, but the Sarbanes-Oxley Act is a lengthy piece of legislation. However, and similar to the major provisions worth noting, there are some key requirements worth outlining. 

    These include: 

    • There are requirements for attorneys to report any security violations to the CEO when they represent public companies before the SEC
    • The requirement for no corporation to provide executives with personal loans 
    • The requirement to disclose any transactions and relationships that are off-balance sheet in periodic reports if they impact the financial status 
    • If it becomes known that there was tampering or destroying of documents relating to investigations or court action then there will be fines and terms of imprisonment 


    The Sarbanes-Oxley Act of 2002 created a reform to previous laws surrounding financial and securities regulations. This reform came from highly publicized financial scandals in the corporate world, involving the likes of Enron Corporation and WorldCom. 

    In the act, it outlines new rules for accountants, corporate officers, and auditors to ensure recordkeeping was more stringent. If someone is found to have broken any of the provisions outlined in the act, there were also new fines and punishments put into place, such as jail time. 

    This was all ultimately intended to create a better environment for companies and their stakeholders and to make those that violate securities laws face penalties for noncompliance. 

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    FAQs ABout Sarbanes Oxley

    What Was the Main Purpose of the Sarbanes-Oxley Act?

    The main purpose of the Sarbanes-Oxley Act was to create reform that protected investors from corporations that took part in fraudulent financial reporting. 

    What Is Subject to Sarbanes-Oxley?

    Any and all publicly traded companies throughout the United States are subject to the Sarbanes-Oxley Act. As well, foreign companies that are publicly traded and conduct business in the United States are also subject to the act.

    What Is the Sarbanes-Oxley Audit?

    With the Sarbanes-Oxley Audit, companies are required to audit their financial statements yearly. This helps verify the company’s financial statements and how they were created.

    Are Private Companies Subject to the Sarbanes-Oxley Act?

    Private companies become subject to Sarbanes-Oxley if they’re preparing for an IPO. That said, some provisions in the Act apply to private companies.

    Financial Statement Audits, Reviews, Compilations

    1. Sarbanes Oxley
    2. Assurance
    3. Engagement Letter


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