The Public Company Accounting Reform and Investor Protection Act of 2002 commonly known as Sarbanes-Oxley or SOX after the two authors of the bill, was enacted on July 30, 2002 in response to several major corporate and accounting scandals, the most infamous being the meltdown of energy giant Enron.

Sarbanes-Oxley includes some of the most far-reaching reforms of American business practices since the Depression Era and it not only apples to U.S.-based parent companies, but subsidiaries organized outside the borders of the United States. This means that U.S. business operating in China must remain compliant, challenging them to design and maintain their internal control structure in an accounting and reporting environment that is early in its development and is rapidly changing.

Many Chinese accountants and local Chinese CPA firms lack the expertise and experience to establish, maintain and review internal control systems. Despite these challenges, when contemplating an entry into the China market, SOX compliance should be considered with equal importance as the location and legal structure of the proposed China operations. Early internal control design and implementation in tandem with proper organization under Chinese laws will contribute to a smoother transition and earlier success.

Sarbanes-Oxley is arranged into eleven titles each with their respective sections. From a corporate compliance perspective there are five sections with the most relevance: sections 302, 401, 404, 409, and 802. Of these sections, section 404 has the most relevance to U.S.-China businesses and the largest impact on corporate financial reporting and internal control implementation, maintenance and assessment.

This article was created on: 2011.12.12