Analysis of the Sarbanes-Oxley Act

3143 Words Mar 14th, 2012 13 Pages
Analysis of the Sarbanes-Oxley Act

Abstract

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence. In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting. Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a
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A recent study by Xue Wang (Emory University) tackles how SOX has affected the compensation and turnover rates of CFOs. They play a critical role in developing firms’ financial reporting and making voluntary disclosure decisions. Moreover, CFOs are ultimately responsible for the quality of internal control systems. The study provides some important insights about the impact of SOX on the executive labor market. It shows that requiring more disclosure of information about a firm’s internal controls provides some positive benefits with respect to corporate governance, in this case making it easier for boards to monitor the activities of CFOs. In comparing and contrasting firms with strong internal controls received an increase in salary, bonus, and total compensation in the post-SOX time periods. In contrast, CFOs of corporations reporting a problem with their internal controls incurred a significant reduction in their compensation packages. With respect to CFO turnover, Wang did find that CFO turnover rates generally increased form the pre- to post-SOX period.

Outside independent audit firms

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general

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