The Sarbanes-Oxley Act was passed in the U.S. in 2002. There are many sections to this law and most of which have a significant impact on the way large publicly traded companies do business.
Section 302 of SOX relates to the corporate responsibility for financial reports. This has a significant impact on executive management because the signing officer must review the report; feel confident that to their individual knowledge, no statements contained within the report are untrue or omit important details for the specified financial periods stated on the report.
The latter is noteworthy because omission could lead to misleading information to those viewing the financial statements. As a part of SOX's objective, one of the purposes was to increase transparency so investors, potential investors and those holding an interest in these companies can see what's going on in terms of financial reporting and a trail is made to ensure no funny business occurs when it comes to financial statements.
Section 302 also states that executives who are responsible for the integrity of the report also understand they are responsible for internal control efforts, used due care in implementing controls, and have examined the effectiveness and formed conclusions regarding the internal controls in the 90 days previous to the report and have reported on those results.
This legislation is paramount because executives in publicly held companies essentially have to take responsibility for any misrepresentation of information or fraud. This includes any weaknesses or deficiencies in controls that exist and the executives also have to report on their internal controls.
All of this significantly increases the level of transparency in a company. Since individuals are now held accountable for their actions and those of their company, this is a great incentive to ensure that no other executives or managers are conducting any unethical or unusual behavior when it comes to financial reporting.
SOX and Section 302 have had a significant impact on those large companies and can drastically affect how things in the company were conducted pre-SOX. No longer can executives feign ignorance or lack of knowledge if something illegal, unethical or simply unacceptable occurs in their company.
Due to the stipulations outlined in Section 302 managers have to be on top of everything related to financial reporting and must ensure that reasonable efforts and strong control efforts are in place to reduce any level of fraudulent activity or else they are held responsible. The impact to executive management regarding Sarbanes-Oxley section 302 is significant.