In response to a number of financial scandals (including Enron and WorldCom)
involving a lapse of internal financial controls, the American Competitiveness and
Corporate Accountability (or Sarbanes-Oxley) Act was established in 2002 and introduced
new standards for financial audits and internal controls.
The Sarbanes-Oxley Act (SOX) established detailed procedures that U.S. companies,
along with foreign firms listed on the U.S. stock exchange, as well as their auditors
must follow in order to document, assess, and improve their internal controls
relating to financial reporting.
Pursuant to the Act, CEOs and CFOs of U.S. public companies must certify that:
* They have reviewed the companies’ financial reports.
* These reports do not exclude any significant information.
* Information presented in financial reports is accurate and fairly represents the
companies’ operational and financial condition.
* Each of the certifying officers is responsible for the company’s internal controls,
has evaluated them over the course of the period (quarterly or annual) for which
the financial reports have been prepared, and has reported any deficiencies in or
changes to the existing internal controls.
By signing off on these reports the company officers can be held
personally and criminally responsible if financial information in the company’s
reports is later shown to have been false and misleading.