Description Of The Sarbanes-Oxley Act

What is the Sarbanes - Oxley Act? There are actually various different definitions, but they all have the same common meaning. The Sarbanes - Oxley Act (SOX) is an act that was passed by the United States Congress to protect shareholders and the general public from accounting errors and unlawful practices in the enterprise. It also improves the accuracy of corporate disclosures. According to Julia Hanna (2014), “it is widely deemed the most important piece of security legislation since formation of the Securities and Exchange Commission in 1934.” The Sarbanes - Oxley Act was thought of because of a series of financial scandals involving big name companies that occurred in the early 2000s. The companies involved with these financial scandals
The most important sections of these titles are often considered to be 302, 401, 404, 409, 802 and 906. Section 302 is about the corporate responsibilities regarding financial reports. Section 401 pertains to disclosures in periodic reports also known as off balance sheet items. The most controversial section of the Sarbanes - Oxley Act is Section 404, which requires management to produce an "internal control report" as part of each annual Exchange Act report. This is the most costly part of the act for businesses to perform because documenting and testing important financial controls requires great effort. Section 409 deals with real time issuer disclosures. This section requires issuers to disclose to the public, on an dire basis, information on material changes in their financial condition or operations. The three rules that affect the management of electronic records is located in Section 802 of the Sarbanes - Oxley Act. The first rule deals with the destruction, alteration or falsification of records, and the resulting penalties. The second rule explains the retention period for records storage. It indicates that corporations should securely store all business records using the same guidelines set for public accountants. The third rule refers to the type of business records that need to be stored, including all business records and communications, which also includes electronic communications. If a business fails
“The biggest pro has to be the restoration of investor confidence, which was the primary purpose of the act. The most obvious con is the cost” (Keglovits). One pro of the Sarbanes – Oxley Act is companies have better internal control environments. This helps lead to more accurate information being available to investors. Another pro is everyone in financial reporting has increased responsibilities and consequences for not living up to those responsibilities. This helps ensure people know exactly what their responsibilities are while working and that they will do these responsibilities or suffer the consequences. One con of the Act is smaller companies that are audited will have to pay higher audit fees even if they are not subject to Sarbanes – Oxley. This is because auditors are now more responsible and accountable for their audit reports on their clients, which means that more audit testing is done. Another con is the act was passed without any specific guidance to companies as to how it should be implemented. This resulted in companies making their own ways to assure compliance, which was ineffective and