The Sarbanes-Oxley Act of 2002 (also known as the Public Company Accounting Reform and Investor Protection Act, and the Corporate and Auditing Accountability and Responsibility Act) greatly increased the importance of investor relations in the financial markets. The United States federal law enacted new requirements for corporate governance and regulatory compliance, with greater emphasis on accuracy in auditing and public disclosure. Notable provisions of the act which apply to investor relations include enhanced financial disclosures and accuracy of financial reports, real-time disclosures, off-balance-sheet transaction disclosures, pro forma financial disclosures, management assessment of internal controls, and corporate responsibility for financial reports.
The Sarbanes-Oxley Act is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH), and as a result of the act, top management must now individually certify the accuracy of financial information. Penalties for fraudulent financial activity were also enhanced and ramifications are now much more severe. In addition, the act increased the independence of the outside auditors who review the accuracy of corporate financial statements, as well as the oversight role of boards of directors.
The Sarbanes-Oxley Act was created in response to a variety of corporate scandals which cost investors billions of dollars and shook public confidence in the nation’s securities markets. Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom were among those involved in these corporate and accounting scandals.