Regulatory Compliance and Governance – Sarbanes-Oxley Act (SOX) Act (Sections 302, 401, 404, 409, and 802)

Assignment Instructions

Scenario: The Sarbanes-Oxley Act (SOX) has been in effect since 2002 and has cost businesses millions of dollars in personnel and administrative costs. Your company is in the process of "going public," has underwritten its Initial Public Offering (IPO), and filed its registration statement with the Securities Exchange Commission. Your current executive team has asked you to create a plan ensuring SOX compliance is followed once you become a publicly traded company.

Review the pertinent sections of The Sarbanes-Oxley Act (SOX) Act.  For purposes of this proposal to the board, only concern yourself with the compliance provisions of SOX (Sections 302, 401, 404, 409, and 802).

Create a maximum 1,050-word proposal to the board outling the compliance project necessary to implement SOX.


Sample Solution – Sarbanes-Oxley Act (SOX) Act (Sections 302, 401, 404, 409, and 802) Regulatory Compliance and Governance


The 2002 Sarbanes-Oxley Act (SOX) is an act which was in 2002 approved by the U.S. cross to safeguard investors from the likelihood of fraudulent accounting action by corporations. The SOX Act demanded strict reforms to curb accounting fraud and enhance corporation financial disclosures. This act was developed in retort to early 2000s accounting malpractices, when numerous public scandals that include WorldCom, Tyco International Plc, and Enron Corporation shook the confidence of investors in financial statements, creating regulatory standard renovation demand. The act was anticipated to assist in restoring and protecting investors’ confidence by enhancing transparency, reliability, and accuracy of corporate financial disclosures and reporting, and reinforce the significance of corporate moral standards (, 2006). This paper reviews various sections of SOX Act with intention of enhancing the corporate compliance while going public.

SOX Act Pertinent Sections

To be able to qualify to be publicly traded the company needs to adhere to the relevant sections of the SOX Act. These sections include 302, 401, 404, 409 and 802.

Section 302

Section 302 of the SOX Act addresses corporate financial reporting responsibility. Based on this section, the senior management of a corporation needs to verify the accuracy of the reported financial statement by appending their signatures. The their certification needs to confirm that they have reviewed the report and that the report does not have any omitted material, material that can be regarded to be misleading, or any untrue material statements. They should also affirm that the financial statements and all associated information honestly representthe actual financial condition of the company. According to this section, the signing offers have an obligation to ensure internal controls of the corporation financial reporting. They must assess these internal controls for not more 90 days and presented their results after the financial statements have been created either quarterly or annually. The officers are therefore to provide information on all financial reports deficiencies and any fraud information where workers in internal control are involved in. Any important modification of internal controls or associated aspect which could contain negative influence on the controls should also be reported. The Act also demands that the corporation should not try to avoid the section requirements by transferring or reincorporating their activities in foreign countries (, 2006).

Section 401

This section deals with periodic reports disclosures. According to the section, any financial report that has financial statements and which is demanded to be prepared based on commonly accepted principles of accounting need to show all material amending adjustments which have been recognized by registered firm of public accounting with regard to accounting principles that are generally accepted, and also based on regulations and rules of the commission. In addition the registered and issuers investment firms must reveal off-balance sheet material of transaction when making reports to the Security and Exchange commission (, 2002). The off-balance sheet reporting must follow the regulations that include the defined off-balance sheet obligations, arrangement, transactions, as well as other issuers’ relationships with other persons or unconsolidated entities which might have future or current effect of material on financial condition, capital resources, operations results, capital expenditures or liquidity.

The section also guides on pro forma figures should be presented. In this case the pro forma figures must only contain true material fact statement without omitting any necessary material fact so as to make the financial statement of the pro forma, in light of the situation in which it is presented clear without misleading. The pro forma financial statement should also be matched with financial condition and operations results of the issuer based on accepted general principles of accounting. The section also guides on special purpose entities report and study. The sub section needs the commission to determine the level of off-balance sheet transactions and if the issuers financial statements shows the transactions of economies of off-balance sheet to investors in a transparent manner (, 2002). Thus the company needs to show its off-balance reporting in a transparent way to pass this assessment.

Section 404

This section demands that the auditors and management develop reporting methods and internal controls on the control adequacy. This section has considerably expensive results for publicly traded firms as it is costly to maintain and establish the needed internal control. Based on this section, issuers are needed to publish information regarding internal control procedures and structure adequacy and scope for their annual financial reports. In addition, the statement shall evaluate the effectiveness of this kind of procedures and internal controls. Moreover, the section require that the registered firm of accounting to report on and attest to the assessment on the internal control procedures and structure effectiveness for financial reporting (, 2002).

Section 409

The section is more concerned on issuer disclosures at the real time. Based on this section, companies are demanded to disclose urgent foundation information regarding changes of material in its operations and financial condition at real-time. The disclosures are to be reported in simple words that can be understood easily. This information should also be supported by suitable graphic presentations qualitative and trend information.

Section 802

This is the section that addresses criminal and corporate fraud accountability. It relates to the consequences of criminal documents alteration. The section enforces prices of fines or/and not more than 20 years of imprisonment for falsifying, mutilating, altering, concealing, ad destroying of tangible objects, documents or records with the intention to influence, impend, or obstruct a legal investigation. In addition, the section enforces penalties of imprisonment not more than 10years or/and fines on accountant who willfully and knowingly violate the demands for paper reviews or all audit maintenance for a 5 years period (, 2006).


SOX laws were created to safeguard the interest of investors who companies depend on when they decide to trade publicly. When a company decides to go public it invites the need for thorough scrutiny from investors and other interested stakeholders. It also has no choice other than to adhere to the required rules and regulation. The SOX demands require that the company invest more on developing accurate financial reports that follow public accounting principles. This means the company must employ qualified accountants who will play this role effectively. It also demands that the company establishes an internal control to recheck the financial reporting provided by the accountants. Thorough auditing is required at internal level and reporting of the audits. The laws also give the time limit for these reviews and reporting to ensure that the investors are well informed of the company’s situation within the required time. Failure to adhere to these requirements can not only results to imprisonment and fines, but also damages the public image of the company to its investors as well as potential investors. This would severely affect the share values of the company or even makes some investors to withdrawal. Thus, the company has to understand the rules, employ the right strategies to ensure that they are effectively implemented despite of the involved cost.

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