Sarbanes-Oxley Act of 2002
June 8, 2015
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (SOX) was established after many corporate scandals such as Enron, WorldCom, and AIG cost investors billions of dollars. Financial fallout from these scandals reduced the American public's trust in the economy. The enactment of SOX in 2002 holds corporations to higher standards in reporting financial statements to internal and external users. Even though the standards for SOX are still evolving, the new regulatory environment generated in its wake will now protect the public and the market from fraud within corporations. This paper will discuss the main aspects of the SOX Act, its imposed requirements and its effectiveness in avoiding future fraud. Passage of the SOX Act
Regulatory compliance has always been a part of doing business. There are many regulations developed to help protect the public from fraud and most businesses must meet certain industry standards. According to Kimmel, Weygandt & Kieso (2011) “Congress passed the SOX Act to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals” (p. 8). SOX was “named after Senator Paul Sarbanes and Representative Michael Oxley, who were its main architects” (“The Sarbanes-Oxley Act Summary and Introduction,” 2006).
The SOX Act provides a solid set of internal controls and auditing standards that are aimed to discourage and punish corporate and accounting fraud, as well as corruption. SOX is designed to carry out these tasks by imposing severe penalties for civil or criminal acts, while protecting the interest of workers and shareholders. The SOX Act restores investor confidence by regulating financial auditing procedures and making them transparent to the general public and investors. In order for the Act to be successful enforcement is crucial. Only by fear of penalty or imprisonment will this act be enforceable. Regulatory Requirements of the SOX Act
The Sarbanes-Oxley Act contains 11 sections (or titles) which contain specific requirements for financial reporting. As far as compliance is concerned, Sections 101, 302, 401, and 404 (detailed below) are the main imposed requirements of SOX. Sections 802 and 906 detail the penalties and incentives to avoid future fraud. As a result of SOX, these sections, according to Kimmel et al (2011), address the following aspects of regulatory compliance: Top management must now certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors. (p. 8) Section 101: Establishment; Administrative Provisions
“The Public Company Accounting Oversight Board (PCAOB) is directed by the Sarbanes-Oxley Act of 2002 to establish auditing and related professional practice standards for registered public accounting firms to follow in the preparation and issuance of audit reports” (Public Company Accounting Oversight Board, 2015). The group administers “the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection” (Public Company Accounting Oversight Board, 2015). Additionally, each board member shall serve a term no greater than five years, and no person may serve on the board consecutively for more than two terms (Public Company Accounting Oversight Board, 2015). Section 302: Corporate Responsibility for Financial Reports
“As a result of SOX, top management must now certify the accuracy of financial information” (Kimmel et al., p. 9). These certifications require that a corporation’s top management officers accurately disclose the company’s financial data and objectively represent its financial picture every quarter to establish...
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