Sarbanes-Oxley Act

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Paul Sarbanes (left) and Michael Oxley

The Sarbanes-Oxley Act of 2002 (also SOX , SarbOx or SOA ) is a US federal law that, in response to accounting scandals by companies such as Enron or Worldcom , improves the reliability of reporting by companies that use the US public capital market should. It was named after its authors, the Chairman of the Committee on Banking, Housing and Urban Development of the United States Senate , Paul Sarbanes ( Democrat ), and the Chairman of the Committee on Financial Services of the House of Representatives of the United States , Michael Oxley ( Republican ).

overview

The aim of the law is to restore investor confidence in the accuracy and reliability of the published financial data of companies. The law applies to US and foreign companies whose securities are traded on US stock exchanges ( National Securities Exchanges ), whose equity securities are traded over the counter in the USA, or whose securities are publicly offered in the USA ( Public Offering ) as well as for their subsidiaries.

The law is divided into sections (German: paragraphs or articles). Section 404, the most popular and costly, requires that every annual report include an assessment by management of the effectiveness of the internal control system for financial reporting and an auditor's opinion on the effectiveness of the internal control system for financial reporting. An internal control system encompasses all measures intended to ensure the quality of the quarterly and annual financial statements prepared with the accounting. Overall, the law leads to far-reaching changes in corporate governance .

The Sarbanes-Oxley Act was passed by Congress on July 25, 2002 and entered into force on July 30, 2002 when it was signed by President George W. Bush .

The 66-page law concerns various aspects of corporate governance, compliance and reporting obligations of public companies as well as the associated enforcement. Specifically, the act created the Public Company Accounting Oversight Board (PCAOB), an independent regulator for accounting firms that audit the financial statements of companies that must be filed with the Securities and Exchange Commission (SEC) (i.e. the three categories of companies mentioned above).

Some regulations were completely new. Other regulations that were previously considered best practice standards or simple procedures for listing on the stock exchange or in connection with SEC guidelines have been regulated by federal law.

On March 2, 2005, the US Securities and Exchange Commission (SEC ) decided to grant foreign companies listed on US stock exchanges ( Foreign Private Issuers ) a one-year postponement for compliance with Section 404 of the Sarbanes-Oxley Act. As a result, these companies only have to meet the relevant requirements for fiscal years ending after July 15, 2006.

Character of the law

The Sarbanes-Oxley Act is a US federal law. The majority of the sections do not represent a new federal law of their own, but rather supplements or changes existing federal laws, such as the Securities Exchange Act and the Securities Act, or asks the US Securities and Exchange Commission to issue new regulations . In addition, the federal penal code or statute of limitations for certain offenses will be changed and the US Sentencing Commission will be instructed to revise the Federal Sentencing Guidelines for certain offenses. Only the first title remains as an independent, permanently preserved law. With the Public Company Accounting Oversight Board, it creates a supervisory authority for accounting firms who review the financial statements of companies that must be filed with the US securities and stock exchange regulator.

scope of application

Almost all of the provisions of the Act apply to domestic and foreign companies whose securities are traded on US stock exchanges, whose equity securities are traded over the counter in the United States, or whose securities are publicly offered in the United States. In particular, the regulations on the regulatory authority for auditors, the Public Company Accounting Oversight Board (PCAOB) apply from the submission of an application to register a security with the US Securities and Exchange Commission in preparation for the public offer of this security in the USA. Only the regulations for the independence of the members and the tasks of the Audit Committee are limited to companies whose securities are traded on US stock exchanges. In addition, the interpretation of US federal courts has limited the labor law protection of whistleblowers to employees of US companies.

Come into effect

Some directly effective sections of the Sarbanes-Oxley Act (e.g. Section 906) came into force when the law was signed by President George W. Bush on July 30, 2002. For other sections that request the US Securities and Exchange Commission to issue ordinances on certain topics, the effective date is determined in the ordinance itself. In the much criticized Section 404, which deals with the audit of the internal control system (ICS) for accounting, the entry into force was repeatedly due to various delays after the market capitalization ( large accelerated filer, accelerated filer, non-accelerated filer ) and for US American ( domestic issuers ) or foreign securities issuers ( foreign private issuers ) postponed differently. Section 404 (a), which requires management to assess the effectiveness of the ICS for accounting, has now also come into effect for US and foreign non-accelerated filers for fiscal years ending on or after December 15, 2007 . On the other hand, Section 404 (b), which requires the auditor to check the effectiveness of the ICS for accounting, only comes into effect for fiscal years ending on or after December 15, 2009.

Content

  • Confirmation of the correctness of the financial statements (similar to an affidavit) by the CEO and the CFO
  • Repayment of performance-related remuneration to the CEO and CFO in the event of incorrect financial statements that subsequently lead to corrections
  • Prohibition of granting loans to management
  • Tighter regulations on the independence of the members of the Audit Committee ( Engl. Audit Committee ) and of the administrative or supervisory board ( board of directors )
  • Obligation of the Audit Committee to approve non-audit services by the auditor
  • Prohibition of providing audit-related services or non-audit services in addition to the audit by the selected auditor
  • Obligation of the auditor to inform the audit committee about critical processes and alternative proposals for accounting
  • Creation of a new and independent supervisory authority for the auditors: Public Company Accounting Oversight Board (PCAOB) with extensive monitoring rights
  • Regulations on the independence and stricter liability of auditors (rotation of audit partners, conflicts of interest, etc.)
  • Regulations for setting up whistleblower systems and whistleblower protection
  • Reorganization of the responsibilities of managers of the listed company
  • Extended financial disclosure requirements (e.g. via the internal control system)
  • Tightening of criminal regulations

Legal conflicts

The scope of the Sarbanes-Oxley Act extends to American companies and audit firms as well as to foreign audit firms and companies with a US stock exchange listing. The resulting extraterritorial effect of the Sarbanes-Oxley Act led to international discussions about possible conflicts with national regulations; For example, the Sarbanes-Oxley Act provides for the individual liability of board members, which is not anchored in German law. In addition, the Sarbanes-Oxley Act requires e.g. In some cases, by lawyers, acts and behaviors that, in Germany as betrayal of parties or breach of the duty of confidentiality, can lead to sanctions under professional or even criminal law. How these conflicts can be resolved is largely unclear.

The term Sarbanes-Oxley Act is widespread, which means that corresponding directives of the European Community are colloquially listed under the term EuroSOX and comparable regulations in Japan under J-SOX.

Effects

The effects of the Sarbanes-Oxley Act are complex and affect three types of institutions.

There are, on the one hand, the direct effects of the Sarbanes-Oxley Act on companies (this refers to listed companies and auditing firms) and, on the other hand, the indirect effects that legislative changes at EU level and in Germany bring with them.

For audit firms, this means, on the one hand, the ban on the simultaneous provision of audit and advisory services and, on the other, the end of self-regulation (change from peer review to monitoring). The establishment of the PCAOB and its equipment with extensive control and investigative powers led to legal changes in Germany as well. Thus, with its newly established and more restrictive supervisory system, the USA has raised the international standards for the supervision of audit firms and put Germany under pressure. The laws APAG, BilReG and BARefG represent a fundamental reform of the supervisory system for auditors. The main aim of these laws is to achieve recognition of the German supervisory system by the PCAOB in order to avoid conflicts that arise from the regulations of the Sarbanes-Oxley Act, to be able to avoid.

For companies listed on US stock exchanges, the Sarbanes-Oxley Act means a significant interference in business processes. The focus here is on the regulations for the implementation and evaluation of an internal control system (ICS), which is primarily intended to ensure the correctness of financial reporting. Not least because of the increased liability requirements for management with regard to the correctness of financial reporting, the effectiveness of the ICS is moving into the focus of management. A well-functioning ICS has been in the fundamental interests of corporate management at least since the Sarbanes-Oxley Act.

literature

  • Florian Frugier: The establishment of modern internal control systems in companies with a US listing. Political and operational framework conditions and special features of the implementation of the Sarbanes Oxley Act in Germany. Diplomica Verlag , 2009, ISBN 978-3-8366-6912-2 .

Individual evidence

  1. ↑ Hans Caspar von der Crone , Katja Roth, The Sarbanes-Oxley Act and its extraterritorial significance, Current Legal Practice 2003, pp. 131 ff.
  2. ^ Katja Moritz, Marco Gesse, The Impact of the Sarbanes-Oxley Act on German Companies, in: Contributions to transnational business law, Issue 49, Halle.
  3. ↑ Florian Frugier: The establishment of modern internal control systems in companies with a US listing. Political and operational framework conditions and special features of the implementation of the Sarbanes Oxley Act in Germany. Diplomica Verlag , 2009, p. 2ff, ISBN 978-3-8366-6912-2 .

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