Before 2002, shocking scandals in the stock markets generated substantial losses to investors and, for a time, the United States economy was in near chaos. Enough evidence of impropriety, financial statements, market analysts, politicians and company executives, emerged to increase investor skepticism for a long time (Larson, Thompson and Walters, 2004). The primary focus of this problem was the concerns regarding the ethical behavior of business enterprises and the effectiveness of accounting and auditing norms (Larson et al. 2004). The Sarbanes-Oxley Act of 2002 was signed into law by President George W. Bush to enhance the public's confidence in the accounting profession (Larson et al., 2004). This Act, considered one of the most noteworthy …show more content…
One benefit that has resulted in the passage of this Act is that it has amplified companies’ board of directors’ consciousness of their accountability, reliability, and requirements of their work (Larson et al., 2004). Board members are now questioning their roles and responsibilities, and working together with the company’s CEO and management. Another benefit, the Sarbanes-Oxley Act increased the time obligation a board member must be a member. Additionally, board members now must have a better understanding of his or her role representing the shareholders. Board members are making difficult decisions as a result of the Sarbanes-Oxley Act (Larson et al., 2004). An example is a former CEO of Tyco desired a personal loan from the company to avoid personal financial problems that would distract him from effectively managing the business. The CEO was denied the company loan by board members because the board members knew that his request was associated with a personal problem and that shareholders’ money was not appropriate to credit (Larson et al., 2004). Another good example of the benefits of the Sarbanes-Oxley Act is the WorldCom story. WorldCom directors, all twelve of them, had to pay approximately $25 million of their money to settle shareholders’ claims (Graham and Roth, 2008). Also, the Act established an age of regulated fiduciary responsibility for CFOs and CEOs. The Act forced companies to upgrade the professional qualification of their organizations to operate efficiently. Finally, the Act via the PCAOB mandates that any person associated with public accounting organization must disclose any criminal action against them, along with any criminal convictions within the last five years (Larson et al.,
Throughout history and in our own time, legitimate accounting methods have been utilized to fraudulently engage in manipulating activities that results in illicit gains to the perpetrators and losses to individuals and financial institutions.
In the past, many corporate executive have committed various forms scandals in their organizations. Such fraudulent arts are unethical and immoral behavior. This led the US government to form legislation in order to control fraudulent activities; mostly performed by senior officers in the organization. In view of this, this paper will address the following: historical summary on SOX enactment, the key ethical components of SOX, social responsibility implications regarding mandatory publication of corporate ethics, whether the criticisms of SOX implication presents an unfair burden on smaller organizations and suggestions on the improvement of SOX legislation.
The Sarbanes-Oxley is a U.S. federal law that has generated much controversy, and involved the response to the financial scandals of some large corporations such as Enron, Tyco International, WorldCom and Peregrine Systems. These scandals brought down the public confidence in auditing and accounting firms. The law is named after Senator Paul Sarbanes Democratic Party and GOP Congressman Michael G. Oxley. It was passed by large majorities in both Congress and the Senate and covers and sets new performance standards for boards of directors and managers of companies and accounting mechanisms of all publicly traded companies in America. It also introduces criminal liability for the board of directors and a requirement by
The Sarbanes-Oxley Act was passes in 2002 in response to a handful of large corporate scandals that occurred between the years 2000 to 2002, resulting in the losses of billions of dollars by investors. Enron, Worldcom and Tyco are probably the most well known companies that were involved in these scandals, but there were a number of other companies guilty of such things as well. The Sarbanes-Oxley Act was passed as a way to crackdown on corporations by setting new and improved standards that all United States’ public companies and accounting firms were and are required to abide by. It also works to hold top level executives accountable for the company, and if fraudulent behaviors are discovered then the executives could find themselves in hot water. The punishments for such fraudulence could be as serious as 20 years jail time. (Sarbanes-Oxley Act, 2014). The primary motivation for the act was to prevent future scandals from happening, or at least, make it much more difficult for them to happen. The act was also passed largely to protect the people—the shareholders—from corporations, their executives, and their boards of directors. Critics tend to argue that the act is to complicated, and costs to much to abide by, leading to the United States losing its “competitive edge” in the global marketplace (Sarbanes-Oxley Act, 2014). The Sarbanes-Oxley act, like most things, has its pros and cons. It is costly; studies have shown that this act has cost companies millions of
Senator Paul Sarbanes and Representative Michael Oxley created the act to keep businesses from producing false financial documents just to get investors to invest into the company because it appears that the business is doing very well. Companies like Enron under this new act couldn’t produce the false accounting statements without first having an auditor coming in and checking over the inventories or book keeping data. Now investors can relax a little more and not worry that the financial statements are falsified or are generalized and rounded up to make the company look good. Investors can trust that the auditors are doing their job and verifying the books and data for those companies.
The Sarbanes Oxley Act came to existence after numerous scandals on financial misappropriation and inaccurate accounting records. The nature of scandals made it clear there are possible measure that could be used to prevent future occurrence of financial scandals. And the existence and effectiveness of Sarbanes Oxley has caused
Should CEOs and CFOs be held accountable for fraudulent accounting practices? Should investors have complete and accurate information regarding potential investments? Following the Enron scandal in 2001, when Enron filed for bankruptcy after it was discovered that the company employed improper accounting practices, the alarm rang on Capitol Hill and the Sarbanes-Oxley Act (SOX) of 2002 was penned. SOX is one of the most significant regulatory reform’s since the Great Depression (McAdams et al, 2009, p.390).
One of the major issues that Butler and Ribstein (2006) take with the Sarbanes-Oxley Act is that the law was put into place quickly and in response to current economic disasters. Instead of allowing time to pass and for substantial amounts of analyses to be conducted in order to determine the best course of action, legislators were responding to several high-profile cases of business malfeasance, such as in the case of the Enron Corporation. People of the
After major corporate and accounting scandals like those that affected Tyco, Worldcom and Enron the Federal government passed a law known as the Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act. This law was passed in hopes of thwarting illegal and misleading acts by financial reporters and putting a stop to the decline of public trust in accounting and reporting practices. Two important topics covered in Sarbanes-Oxley are auditor independence and the reporting and assessment of internal controls under section 404.
Global bribery scandals in the 1970s brought about the first developmental period of codes (Messikomer & Cirka, 2010, p. 57). Later, after the public discomfort towards continuous ethical lapses of major U.S. corporations, the United States Congress enacted the Sarbanes-Oxley Act of 2002 on July 29, 2002. This Act required American companies to reveal whether it has adopted a code of ethics (McCraw, Moffeit, & O’Malley, 2008; Schwartz, 2004). In this Act, the term ‘‘code of ethics’’ referred to written standards that are designed to deter wrongdoing and to promote
The development of the Sarbanes-Oxley Act (SOX) was a result of public company scandals. The Enron and Worldcom scandals, for example, helped investor confidence in entities traded on the public markets weaken during 2001 and 2002. Congress was quick to respond to the political crisis and "enacted the Sarbanes-Oxley Act of 2002, which was signed into law by President Bush on July 30" (Edward Jones, 1), to restore investor confidence. In reference to SOX, penalties would be issued to non-ethical or non-law-abiding public companies and their executives, directors, auditors, attorneys, and securities analysts (1). SOX significantly transformed the procedures in which public companies handle internal
The Sarbanes-Oxley Act of 2002 was created and implemented specifically following the large corporate scandals involving Enron and WorldCom in 2002. The internal auditing was very poor for the corporate giants and they basically performed however they chose. The Sarbanes-Oxley Act caused the corporations to modify their auditing schemes, the compliances became stricter, and the complaints about the new act grew large in numbers. The corporate managers’ focus on increasing their cash flow and expanding their budget was more like an epidemic instead of an honest job duty (Ferrell, Hirt, & Ferrell, 2009).
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 (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
This paper provides an in-depth evaluation of Sarbanes-Oxley Act, which is said to be promoted to produce change in the corporate environment, in general, by stressing issues of public accountability and disclosure in the financial operations of business. It explains how this is an Act that represents the government's and the Security and Exchange Commission's concern in promoting ethical standards in terms of financial disclosure in the corporate environment.