The Sarbanes-Oxley Act (“SOX”) sets forth accounting rules and required disclosures for publicly traded domestic and foreign companies doing business in the United States and private companies preparing to become public. The Act was passed in response to the collapse of Enron as a way to protect shareholders and the public from accounting fraud. In fact, our firm, Hilder & Associates, P.C., represented the Enron whistleblower, Sherron Watkins, who was the catalyst for the legislation.
Basically, SOX compliance requires applicable companies to establish an accounting framework that produces financial reports that rely on verifiable data. The data cannot be revised without documenting the change, the person who made it, the reason and the date.
SOX also requires companies to disclose material changes to their financial conditions and operations in an easily understandable format. Companies must keep and maintain business records for five years. The CEO and CFO are responsible for the accuracy of each financial report submitted to the Securities and Exchange Commission (“SEC”) and can be held criminally liable under SOX for making false or inaccurate reports.
SOX compliance is governed by two agencies: the SEC and the Public Company Accounting Oversight Board (“PCAOB”). The SEC has subpoena power to broadly investigate companies, pursue prosecution, seek civil fines and work in conjunction with the Department of Justice. The PCAOB focuses on the public auditors of applicable companies. Thus, the PCAOB has rulemaking authority to set standards for the preparation of audit reports, inspect public accounting firms and impose fines. Moreover, the agency can request accounting representatives to produce documents and testify.
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At Hilder & Associates, P.C., we have advised corporate clients and individuals regarding compliance with SOX rules, and we have conducted investigations that disclosed violations of which clients were unaware. Oftentimes, individuals who have been subpoenaed or may be targets of SEC investigations have sought our counsel for preparation and accompaniment before the SEC. It is critical to engage counsel who understands the inherent risk of such complicated matters.