In 2002, lawmakers from Texas and the rest of the country passed the Sarbanes-Oxley act to prevent corporations from reporting fraudulent financial reports and to protect investors. According to Investopedia, the act was passed in response to the scandals involving companies such as WorldCom, Tyco International PLC and Enron Corporation.

Lawbreakers face tough penalties after strict reforms were made to the current securities regulations. Auditors, corporate officers and accountants were required to keep more stringent records and violating securities laws became a criminal penalty. The goal was to improve the Securities Exchange Act with a focus on four specific areas:

  • Accounting regulation
  • New protections
  • Increased criminal punishment
  • Corporate responsibility

Along with business practices, the SOX Act also addresses specific requirements for information technology departments. This is in relation to electronic records and determines how long electronic records must be kept and which records need to be kept.

When employees report fraud within a company and testify against an employer, the law also protects them as whistleblowers. Conditions and terms of employment cannot be changed because a person reports illegal activity in company accounting, nor can they fire, blacklist or reprimand the employee. Any corporate retaliation can be reported to the Securities and Exchange Commission.

The Balance suggests that the SOX Act affected companies by increasing costs for audits and placed a larger burden on small businesses instead of large corporations. Some businesses may have opted for private equity funding rather than the stock market. Private companies must have strong internal control structures. They also face difficulty raising capital, greater civil liability and higher insurance premiums. This leads to a potential loss of status among investors, customers and donors.

Because violating this law can greatly affect a business, it is important that companies of all sizes are operating in compliance with the law. A business law attorney may be able to help determine if these guidelines are being met.