Why Was the Sarbanes-Oxley Act Created?

The main reason behind the Sarbanes-Oxley Act is due to the Enron Scandal in the early 2000s. It was a prime example of company greed and the false mark offs of company losses.

Enron was a financial company that had started to fall during the early 2000s. However, the CEO would use mark-to-market accounting and attempt to write off losses and give the company the appearance that it was more profitable instead of showing that it was a failing company.

All of the losses would be transferred to an off the books corporation so that it could remain unreported. While this might have looked great on the company’s records, it’s an illegal act that caused them to go bankrupt and place the CEO in over 5 years in prison.

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act was invented in 2002 to help reduce corporate fraud. Executives are banned from company loans and would give job security to whistle blowers. Basically, it holds the CEO responsible for errors in accounting audits.

Section 404

Section 404 of the Sarbanes-Oxley Act states that executives have to clarify the accuracy of the audits personally. Failure to follow this rule could lead the CEO in 20 years of jail. While the SEC has used Section 404 for over 200 cases, only a few CEOs have been prosecuted and punished for their crimes.

How Did This Affect the US Economy?

Private companies must use SOX and internal control structures. If they don’t, they can face increased difficulties. Not complying to the SOX act will lead to them losing capital. They will have a higher civil liability and greater premiums. This will make them lose their status amongst their investors, customers, and donors.

After the SOX Act, there was a change in the US economy. For example, SOX has increased audit costs. This was a huge disadvantage for smaller companies than large companies. And it convinced a few businesses to resort to private equity funding instead of the stock market.

Now, sox compliance software has been made to help businesses stay on track with the SOX act. It works by helping companies increase their risk intelligence and reporting accuracy to the stakeholders of their organization.

The main benefit of using sox compliance software is the improved company transparency. Enron had only failed because it was unable to prove that it was failing as a company. Using it will help you prevent the same mistakes that Enron did and increase your sales because you are telling the SEC the truth about your daily business operations and expenses.

And, it gives you a form of certification to sign off on the audits. It helps you automate the certification process and get your financial history signed off faster than traditional methods. So it’s best to use it if you want to prevent legal issues and protect your organization.

Conclusion

The sox compliance software will save your organization a lot of trouble from the SEC. That’s why most of the top companies use it each year to prevent any lawsuits and cases from reaching their front door. Thus, make sure you find one that suits your company so that you can continue to grow and thrive as a business.