Passed as a response to the Enron and Arthur Anderson accounting scandals, 2002’s Sarbanes-Oxley Act made the financial reporting requirements for American public companies much more stringent. Companies are continuing to pay for these corporations’ glaring financial mismanagement through increased regulation and oversight.
Sarbanes-Oxley compliance has turned out to be a challenging and expensive process, but understanding it is key to operating a public company in a compliant manner. The best way to understand the impact of the Act is to look at its actual provisions. Five sections of its 11 “titles” specifically deal with compliance:
- Section 302. This section requires that all financial reports be reviewed by their signatories, not contain falsehoods and provide an accurate representation of the company’s financial situation and results. The officers are also responsible for reviewing the company’s internal controls and reporting on any of their shortcomings.
- Section 401. Financial statements must be accurate and include any major off-balance sheet activities.
- Section 404. Companies must provide detailed information about their internal control and audit systems. While this may not seem onerous, this can actually be the most challenging aspect of Sarbanes-Oxley compliance for many companies.
- Section 409. Any material change in a company’s operations or financial situation must be shared with the public as quickly as possible. Disclosures under Section 409 need to be in plain English with as much supporting information as possible.
- Section 802. Officers of companies that falsify or destroy documents can face fines and up to 20 years of prison. Accountants can spend up to 10 years in jail for failing to maintain an audit trail for at least five years.
While most of these demands may not seem particularly challenging, the actual work required to keep spend management compliant with Sarbanes-Oxley can be expensive and time-consuming. Companies can avoid the regulations by remaining private, but that can limit future planning and goals. For those who choose to go public, maintaining compliance is all about keeping financial records in order. This is most easily done by installing advanced accounting software that meets audit and reporting requirements. Thankfully, that same software can offer benefits that transcend regulatory compliance and make your company run more efficiently across the board.