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The US and Sarbanes Oxley Act 2002 - Coggle Diagram
The US and Sarbanes Oxley Act 2002
Rules based approach to CG in response to the corporate collapses in the US in the early 2000s (eg Enrorn and Worldcom)
SOX was enacted, the SEC adopted many new rules and the NYSE and Nasdaq Stock Market changed their standards governing listed companies
The SEC adopted a rule that required all stock markets to adopt standards in their listing rules governing the composition and functions of audit committees and the independence of directors. Both NYSE and NASDQ adopted listing rules requiring that companies listed on their markets to have
A majority of independent directors. Controlled companies where 50% or more of their capital is held by one individual, a group or another company were exempted
Regular executive sessions of the independent directors (where independent directors meet on their own
An audit committee, compensation committee and a nominating committee
Shareholder approval for all equity compensation plans
Introduced new rules on audit independence, restricting the non-audit services an auditor could provide to the company, including a cooling off period for auditors, audit partner rotation and expanded disclosure by the company relating to its auditors
Introduced an indepndent, non-governmental board, the Public Company Accounting Oversight Board to oversee the audits of public companies
Introduced requirements for the CEO and CFO to certify the quarterly and annual reports including fiancnail statements filed wit the SEC. False certifications resulted in SEC penalties and potential civil liability and potential criminal liability
Introduced requirements for management to
Establish and maintain an adequate system of internal controls and procedures for financial reporting
Include in the company's annual report a report on the effectiveness of the company's internal controls over financial reporting
The original implementation was seen as very draconian and costly and was blamed for discouraging foreign companies from listing in the US. In 2006, the provisions were reviewed and the SEC issued new guidance which allowed management more discretion on how the annual review of internal controls is carried out
Introduced requirements for codes of conduct and ethics governing the CEO, CFO, principal accounting officer or controller or persons performing similar positions. It did not require a company-wide code of ethics, which has now become common. The NYSE and NASDQ did bring in requirements for a company wide code of ethics which included directors, officers and employees for companies listed on their exchnages
Other standards applicable to directors and officers were also brought in by SOX/SEC. These included:
Prohibition of personal loans
Reporting of trades in the company's securities
Insider trading blackout periods around the release of material information, such as a company's financial reports
Clawback of bonuses and incentive or equity based compensation where financials have to be restated due to the misconduct of the individual