The Public Company Accounting Reform and Investor Protection Act, called this by the senate, was passed in the year 2002. It was popularly called as The Sarbanes-Oxley act of 2002, and is an amendment to the existing provisions of S 2673, combined with S 1940. It regards the expensing of stock options at the time they are exercised. The amendment paves way to alter legal permissibility for such practices, and to increase taxes on businesses that issue such stock options to employees.
It’s a Federal law passed by the Senate to protect investor interests. It’s known as The Sarbanes-Oxley Act (Sarbox or SoX for short), and came into force on July 30, 2002.
The Act was enacted to prevent public companies from expensing stocks to employees at the time they are exercised, and requires expensing them at the time of their grant instead. It also provides to increase taxes on businesses that issue stock to their employees. Advocates argue that the companies will be made to account the stock options at a time, when their true value cannot be determined. This would entail they withdraw from the practice of issuing stock options to employees. The Act itself was passed on account of several accounting malpractices in which the public companies or their accounting companies purposely perpetrated frauds and caused investors hardships. It is meant to reform business practices and ensure increased criminal liability for those guilty of malpractice.
The Securities markets in the US were badly affected by the Enron, WorldCom and other corporate issues, and the American public lost faith in the securities market. In addition, this prompted the federal government to pass the Act. The provisions in the Act call for accuracy, quality and transparency, in reporting of financial matters by accounting companies, for businesses.
As a main constituent, the Act provided for the set up of Public Company Accounting Oversight Board. This is a non-profit corporation in the private sector, which prescribes standards for audit and accounting practices with public companies.
Other Provisions of the Act
The Sarbanes –Oxley Act has 11 parts relating to the Oversight Board, Auditor Independence, Financial Disclosures, Analyst Conflicts Of Interest and more, for enacting added corporate responsibility, and criminal penalties for investor protection.
Investor protection and prevention of fraud perpetration were intended by the proponents of the act at the time, and hence this legal introduction.