THE SARBANES-OXLEY ACT OF 2002 7
TheSarbanes-Oxley Act of 2002
TheSarbanes-Oxley Act of 2002
Manyinvestors have been affected by fraud in corporations, and financialscandals have resulted in the loss of significant amounts of money.Scam detection and prevention is, therefore, essential in thecorporate world, as this is the only way that establishedcorporations can assure investors that they cannot lose their capitalthrough sham activities. The Sarbanes-Oxley Act (SOX) became afederal law after the Congress enacted and signed it into law in 2002(Anand, 2011). The purpose of this Act was to provide protection toinvestors against fraudulent firms’ activities through theimprovement of the reliability and accuracy of corporate disclosures(Meade, 2013). The bill came in time to save other institutions fromcollapsing due to unethical accounting practices. It contains elevensections that all emphasize on strategies for enhancing financialaccountability in both public and private businesses. This paper willdiscuss the Sarbanes-Oxley Act and evaluate its impact on corporategovernance.
Financialscandals regularly occur in corporations, and they profoundly affectinvestor assurance, particularly when they happen in companies thatare well established. Entrepreneurs and shareholders might notinitially notice accounting malpractices in an organization. Whenfraud continues for a long time, the owners lose their capital afterthe collapse of a company. The SOX Act requires public companies andtheir directors to have new disclosures, and it restricts the numberof services that accounting firms can perform for their auditingclients (Ali & Gregoriou, 2011). The legislation introducedpenalties for violations of the laws of securities and fraud as wellas ensuring accountability in the reported financial statements.
Theintegrity of capital markets is essential considering that a largenumber of people participate in them. The reliability and quality ofthe disseminated financial information maintain the integrity of thefinancial markets, as well as the investor confidence. The Actrequires the Securities and Exchange Commission to supervise theestablished Public Company Accounting Oversight Board (Ali &Gregoriou, 2011). The accounting oversight rules, set by the Act,established a new standard for corporate and accounting governancehence, preventing fraudulent accounting activities.
Oneof the objectives spelled out in the SOX Act’s accounting oversightrules is that a firm’s critical information should be promptlyaccessible to every investor (Stimson, 2011). By availing such data,capital markets become vibrant due to the confidence that investorshave in them. At the same time, markets have to be fair andtransparent as they provide their records since people use thefinancial data to make their decisions in the capital markets. Theaccounting oversight rules in the SOX Act also indicate that the CEOshould vouch for the fairness and accuracy of the public disclosuresfrom their firms (Ali & Gregoriou, 2011). This regulation wouldensure that a company’s management is responsible for any financialfraud that might occur in the enterprise, and for this reason, makingthem liable
Severalincidences involving financial fraud led to the formation of the SOXAct. One of the corporations that had accounting scandals that led tothe changes in the governance of enterprises was Enron.Theorganization collapsed due to the lack of transparent financialdisclosures (Meade, 2013).Suchincidences occur when corporate leaders collude with the auditors tomake erroneous financial statements for personal gain. The provisionsof the Act set up accounting rules that ensure there is no corporateabuse of power in business.
AfterCongress passed the SOX Act, an oversight board for publicenterprises (PCAOB) was formed, and it is responsible for overseeingcorporate audits (Anand, 2011). The agency supervises the preparationof auditing reports. It also restores investors’ trust incorporations, thus ensuring that they make informed investmentdecisions. The PCAOB is made up of five members, and it establishesverification and auditing standards for those in the accountingprofession (Stimson, 2011). By setting the ethical standards foraccountants and CPA firms, the Act mandated the PCAOB to set auditingstandards, register the accounting firms, and conduct disciplinaryproceedings.
Beforethe enactment of the Sarbanes-Oxley Act, companies could hireaccounting firms that were not registered to prepare and issue auditreports. As a result, there was no accountability in the financialstatements and reports that a company issued to the investors. TheAct has different sections addressing securities fraud, newdisclosures for businesses, and other aspects of corporateresponsibility. Section 302 of the SOX Act has guidelines for CFOsand CEOs placing certification rules for a firm’s annual andquarterly financial forms. One of the necessities of this section ofthe Act posits that a financial report should fairly present acompany’s financial condition, and it should not have falsestatements (Meade, 2013). The regulation helps in creating publictrust on enterprises, and it ensures professional accountability.
Theother key stipulation in the Act is Section 404, which deals with theestablishment of internal controls in a company. The Securities andExchange Commission (SEC) requires that an internal control reportshould go with the organization’s annual report acknowledging themanagement’s responsibility in maintaining a power structure(Meade, 2013). Such a monitoring system offers an assurance thatfinancial reporting is accurate, transactions are valid, and thatthere is technical compliance with the regulations.
TheSOX Act further issues responsibility to corporate officers as itallocates them duties to ensure the reliability of financial data.The Act necessitates CFOs and CEOs to provide certification onfinancial results, and a violation of this requirement attracts finesor a prison term of up to 10 years (Anand, 2011). The prerequisite ofofficer certification on financial data ensures accountability, andthe regulations facilitate the proper functioning of capital markets.Equally important, the cascade certification process creates room forcontinuous improvements in organizations since it offers an avenuefor effective communication within corporations.
Theenactment of the SOX Act outlines enforcement policies that have asignificant impact on corporate governance. The Act evidentlyestablished the appropriate checks and balances that facilitateaccountability in financial reporting. An independent externalauditor cannot possibly conspire with a public company’s managementto manipulate the financial records. The role of business governanceis the establishment of responsibilities within a business whiledefining shareholders’ rights, as well as enforcing theentitlements (Ali & Gregoriou, 2011). The SOX policy includedconditions for improved corporate accountability by making theappropriate audit procedures mandatory for every public enterprise.
Abalanced implementation of the advisory, managerial, oversight,internal and external audit functions is crucial in corporategovernance. The SOX Act facilitates the achievement of these tasks.The management’s interests should be aligned with what theshareholders think is best for a company and the Act’s stipulationseliminate motivational issues and conflicts of interest (Anand,2011). Considering that the PCAOB offers oversight of audit reports,there is greater answerability from every official in a publiccompany. Since the SOX Act also stipulates that internal auditors incompanies should have integrity and be independent, a firm can havethe assurance of efficient consultancy services. However, externalfinancial inspectors should also be present to lend credibility tothe monetary reports issued.
TheSOX regulation has also improved corporate administration reportingby addressing issues such as the utilization of pro forma statements.The Act set standards for assessing the quality and effectiveness ofcorporate governance. Before the enactment of SOX, corporations couldconceal information such as unrealized losses and gains, costs ofrestructuring, and the amortization of intangible assets. Theregulations in section 401 of the Act, however, stipulate thatcompanies’ pro forma presentations should not be misleading (Ali &Gregoriou, 2011).
Thethird part of the policy deals entirely with corporate responsibilityand provides guidelines for the governance of a public organization.For instance, section 306 does not allow the top management totransact with equity security acquired when one is still in anofficial capacity (Stimson, 2011). Firms that adhere to such set oflaws improve their company control ratings, and they attract manyinvestors as well. Although conformity with the SOX stipulationsmight be difficult, a corporation can avoid fraudulent accountingactivities.
TheSarbanes-Oxley Act introduced penalties for violations of thesecurities laws. The regulations also controls fraud actionsinvolving securities by ensure accountability in the reportedfinancial statements. The reliability and quality of the disseminatedmonetary information maintain the integrity of the fiscal markets, aswell as the investor confidence. Furthermore, the accountingoversight rules set by the Act created a new standard for corporateand accounting administration. As a result, it prevents fraudulentaccounting activities in businesses. The Act also issuesresponsibilities to corporate officers as it allocates them duties toensure the reliability of financial data and information. The policyhas been significant in preventing the collapse of enterprises as ithas set complicated financial evaluation techniques in businesses.Presently, it is complicated to engage in financial malpractices dueto extensive monetary follow-up processes needed for all corporatebusinesses.
Ali,P., &Gregoriou, G. (2011). InternationalCorporate Governance after Sarbanes-Oxley. Hoboken: John Wiley & Sons.
Anand,S. (2011). Essentialsof Sarbanes-Oxley.Hoboken: John Wiley & Sons.
Meade,D. (2013). FraudPrevention.eBookIt.
Stimson,W. (2011). TheRole of Sarbanes-Oxley and ISO 9001 in Corporate Management: A Planfor Integration of Governance and Operations.Jefferson, NC: McFarland.