Sarbanes-Oxley Act - Why it is also important for Swiss entrepreneurs

The Sarbanes-Oxley Act is the response of U.S. legislators to the major accounting scandals around the turn of the century. The purpose of the act is to ensure reliable reporting by companies in the U.S. capital markets. However, the law has far-reaching implications beyond national borders.

What is the Sarbanes-Oxley Act?

The Sarbanes-Oxley Act (SOX) is a U.S. federal law that was enacted by President Bush in 2002. The purpose of the Sarbanes-Oxley Act is to ensure transparent and reliable reporting by companies operating in the U.S. capital markets. Accordingly, the act primarily applies to U.S. and foreign companies whose securities are traded on a U.S. stock exchange. The Sarbanes-Oxley Act also applies to companies whose securities are traded over-the-counter in the USA, those offering securities publicly in the USA, as well as their subsidiaries.

Why is the Sarbanes-Oxley Act necessary?

The Sarbanes-Oxley Act is the response of U.S. legislative authorities to the major accounting scandals, especially the Enron and Worldcom scandals, at the beginning of the 2000s. Through more than just creative accounting, executive management managed to obtain massive amounts of credit and hide it from regulatory authorities. For example, during the Enron scandal, the creation of over 3500 shell companies led to a massive credit bubble. It was only in the course of investigations following bankruptcy that the schemes were uncovered. The Sarbanes-Oxley Act was enacted to prevent such situations in the future.

What effects does the Sarbanes-Oxley Act have?

The best-known and most costly outcome of the Sarbanes-Oxley Act is the obligation contained in Section 404 to audit the internal control system (ICS). The internal control system is a mechanism or series of audit steps intended to ensure the quality of the financial statements. Section 404 mandates that the effectiveness of the internal control system must be reviewed by management and subsequently confirmed by an auditor. This procedure is intended to ensure the accuracy of the results in the annual report. The additional auditing represents a significant additional effort and extra cost for the companies to which SOX applies. The Sarbanes-Oxley Act has also served as a model for other countries. For about ten years, the obligation to implement an internal control system and have it audited by the audit committee has also been enshrined in Swiss law of obligations (Art. 728a para. 1 item 3 OR).

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