Sarbanes-Oxley Act Analysis

The Sarbanes-Oxley Act was devised and designed to protect shareholders, as well as the public, from errors in corporate accounting and fraudulent business practices. All publicly traded companies, no matter their size, are required to comply with the terms of the Act. The Act was not only created to regulate corporate business practices, but also was created with the intention to help gain back the public’s trust in large, publicly traded corporations. The Act helps the Security Exchange Commission (SEC) in regulating companies and making sure these

This paper will discuss the legislation that was enacted following these events. It is known as the Public Accounting Return and Investor Protection Act, better known as the Sarbanes-Oxley Act, and has been enacted since the year 2002 (Mishkin, 2012, p. 158). This Act is applicable to all public companies within the US as well as any international companies who have securities within the US registered with the SEC ("The Vendor-Neutral Sarbanes-Oxley Site", 2012). In this paper, it will be discussed why Sarbanes-Oxley was enacted and the key specifications.

This guideline helps in brining substantive change in Sarbanes Oxley Act. It has been analyzed that SOX require audit work papers and other relevant information for the period of minimum seven years. These ramifications within a short period help in improving the effectiveness of Sarbanes Oxley Act. SOX are also focused towards using the internal auditors as a critical resource management. Through the internal auditors resources within the organization can be allocated easily and frauds can be controlled (Mayo, 2010). SOX have also developed security professionals in order to handle the issues related to frauds and other internal control problems. Enron is the best example of proving the effectiveness of ramification of Sarbanes Oxley Act.

SOX mandated an evaluation of the effectiveness of a company’s internal controls by both management and the company’s external auditor and formal written opinions about the effectiveness of those controls. In doing this evaluation, managers and auditors are required to examine a broad range of internal controls over financial reporting. The existence of a single material weakness requires managers and auditors to conclude that the company’s internal controls are not effective. SOX has had positive effects on both the quality of financial reporting and the quality of firm’s MCS. With SOX, the accuracy and reliability of corporate disclosures are improved. Also the federal government continues to refine SOX

The Sarbanes-Oxley Act arose as a result of several corporate accounting scandals that became public in late 2001 and early 2002. These scandals involved many publicly traded companies such as Enron, which “boosted profits and hid debts totaling over $1 billion by improperly using off-the-books partnerships”; WorldCom, which “overstated its cash flow by booking $3.8 billion in operating expenses as capital expenses and gave founder Bernard Ebbers $400 million in off-the-books loans”; and Xerox, which “falsified financial results for five years, boosting income by $1.5 billion”, among a long list of others (Patsuris, 2002). In the book Revolutionary Wealth, Alvin and Heidi Toffler (2006) explain that “slowly changing regulatory and

Financial reporting has been dissected over and over again by legislation. The U.S. Securities and Exchange Commission (SEC) hold the key to providing protection and integrity when companies are submitting their financial statements. Although their mission is to provide order and efficiency for financial markets, insidious plans are still developed by companies which ultimately result in turmoil to the economy. To provide a safeguard to investors, the Sarbanes-Oxley Act (SOX) was passed by congress in 2002, which was constructed because of fraudulent acts of well-known companies such as Enron. Before the SOX was inaugurated, two sets of accounting rules were used as guides for CPA firms.

After major corporate accounting scandals, especially from Enron and WorldCom, Congress enacted the Sarbanes-Oxley Act of 2002. It is a United States federal law that set corporate governance over U.S. Public Companies. The bill contains eleven sections which hold a public corporation’s board of directors’ accountable, created criminal penalties for certain misconduct, and created regulations to define how public corporations are to comply with the law. Even though it was enacted almost fifteen years ago there is still debate and controversy. Even now there is talk about Congressional Republicans aiming to loosen a provision of Sarbanes-Oxley, which was introduced in the Financial Choice Act by Jeb Hensarling (R., Texas), the chairman of the

SOX is an important law toward achievements, but for companies that are not set-up to provide that, it can be costly.

Throughout the years, there have always been firms that do not play by the rules. For this reason, there are organizations, like the SEC and FSAB, which regulate Firms. Although there have been fraudulent activities present in the past the early 2000’s was a time of unprecedented fraud. Americans trust in the markets had been lost. For this reason, congress enacted the Sarbanes-Oxley Act in 2002. Although the act is not perfect, it has been extremely effective.

Sarbanes-Oxley Act was enforced in the past but caught everyone’s attention when drastic audit failures from Enron and Worldcom happened. An enhanced act (SOX) was enacted in 2002 improving audit quality. In particular, section 404 provides guidance of assessment to internal control. For an accounting perspective, internal control is a system for internal and external auditors to measure performance and recommend the improvement of the control. It is definitely correct that both enforcement and the system are to address the risks of frauds. In the meantime, a new regulatory agency, the Public Company Accounting Oversight Board (PCAOB) was created to monitor the work of public accountants. Among SOX and the PCAOB, accounting

After the demise of Enron due to accounting fraud, the Sarbanes-Oxley (SOX) Act was created by the government to establish penalties for corporate fraud and require companies to have a code of ethics along with transparency accounting for shareholders (Ferrell, Fraedrich, & Ferrell, 2013). In other words, the Sarbanes-Oxley Act provides a set of checks and balances making it more difficult for a corporation to defraud shareholders. The Sarbanes-Oxley Act created the Public Company Oversight Board, which is responsible for monitoring accounting firms and establishing the rules that must be followed (Ferrell, et al, 2013).

It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.

In 2001 and 2002 the world was taken by surprise by the biggest accounting scandals to ever occur. Enron, Tyco, and WorldCom threw investors, business owners, and employees into a world of panic after they committed fraud and stole millions of dollars. After the scandals became public, investors turned to The United States Congress to ensure nothing of this nature would ever happen again. Therefore, Congress passed the Sarbanes-Oxley Act of 2002 (SOX) to help and restore investors’ confidence. The SOX was established to hold companies more accountable for financial reporting and ensuring companies had the proper internal control procedures in place to prevent an accounting scandal from happening.

The Sarbanes-Oxley Act of 2002 is legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures (Rouse & Spurzem, 2013). SOX were established as result of huge organizations being involved in financial indignity that happened in the early 2000s at popular companies such as Enron, WorldCom and Tyco that effected investors trust. One of the advantages of SOX is that companies are forces to be accountable for their work. They are no longer allowed to mislead investors for their own gain. Those that carry the responsibility of reporting financial information are now being held accountable for the way they choose to use their knowledge. The disadvantages are it is a costly process. It is a strict rule with high consequences, but no solid guideline on how to implement the system the act encounters.

The Sarbanes-Oxley Act was enacted by Congress in 2002 in response to accounting fraud scandals involving several large corporations including Enron, WorldCom, HealthSouth and Tyco. (Reed, Pagnattaro, Cahoy, Shedd, & Morehead, 2013) The bill’s purpose was to protect investors from accounting fraud by mandating strict reforms in financial disclosures, appointing an audit oversight board (PCAOB), and increasing the SEC’s power regarding governance issues. Although there have been some mixed feelings regarding the implementation of stricter government controls through legislation, the forced compliance seems to have largely had a positive impact on the auditing procedure. (Reed, Pagnattaro, Cahoy, Shedd, & Morehead, 2013)