Impact of SOX on Corporate Governance

Very Hard Corporate Governance Regulatory Environment

In recent years, regulatory bodies around the world have emphasized the importance of good corporate governance as a safeguard against financial misconduct and to enhance investor confidence. One significant development in this arena is the Sarbanes-Oxley Act (SOX) enacted in 2002 in the United States. This legislation introduced reforms to improve corporate accountability, including provisions related to internal controls, financial disclosures, and auditor independence.

To better understand the implications of the SOX legislation on corporate governance, consider the following scenario: A public company has made significant changes to its internal control framework in response to SOX requirements. However, management has consistently overridden certain control mechanisms, leading to concerns among shareholders regarding the integrity of financial reporting. Which of the following best describes the regulatory environment's implication on corporate governance in this context?

The presence of SOX mitigates all risks associated with management override of controls.

SOX primarily focuses on the role of external auditors, minimizing the need for robust internal control systems.

While SOX enhances governance frameworks, it does not eliminate the risk of management overriding internal controls.

Hint

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