Reacting to a flood of accounting scandals and media outcry, the U.S. Congress passed the Sarbanes-Oxley Act (SOX) in July 2002. It is administered by the Securities and Exchange Commission (SEC). It sought to prevent future cases such as the one witnessed with Madoff Investment Securities, by improving the accuracy of public company financial statements. An important goal of SOX is to make these financials more meaningful (i.e., transparent) to their intended readers. . It sets guidelines for the corporate board of directors, CEOs and CFOs, audit committees, internal audit function and internal control system. . . Boards of directors are now expected to take a more active role in the oversight of their companies, focusing on risk management and internal control procedures. Audit committees, which are a subset of corporate boards, face new constraints on operating networks and committee composition under SOX. CEOs and CFOs of public companies are under the spotlight like never before, due to SOX. Accountability measures have increased greatly, holding them responsible for the accuracy, preparation, and filing of quarterly and annual financial reports. . The key to gaining the attention of CEOs and CEOs under SOX lies in the severe criminal penalties which may be enforced if fraud is determined. Still, that does not guarantee that corporate management will adhere to SOX legislation. There will always be some executives who feel that they are impervious to the law. They are willing to assume the dangerous risks that are associated with breaking SOX requirements. Although SOX cannot assure 100% compliance for financial statement issuers, and their independent auditors, it is certainly better than doing nothing.
A. Discuss how this law is likely to affect any 6 of the following 7 issues: 1. Public company boards of directors
With the Sarbanes-Oxley Act, boards of directors have adapted to new procedures and new membership requirements (Kelly & Roche-Tarry, 2009). Companies and their boards will now have to face tougher demands in terms of transparency. Boards of directors are expected to play a more active role in determining the strategic direction of the company. Per the International Chamber of Commerce, the board needs to be able to make decisions in order to limit the risk exposure of the company. Several areas such as financing, investments, dividend and crisis management are concerned (International Chamber of Commerce, 2009). The selection process is under scrutiny a lot these days because it is believed that the members of the boards were not properly selected before. Instead of focusing on celebrities, athletes or other CEOs, boards should be comprised of a mix of “functional and industry experts” who have the business’ best interest at heart (p. 6). Their involvement and understanding of the financial environment is crucial, as it allows them to intervene when necessary and choose the audit committee, CEO and CFO judiciously. It is now imperative for boards of directors to focus on risk management and internal control procedures, and to do so, board composition is critical. They should also eliminate any leniency while questioning the CEO and focus on best practices in the company. 2. Audit committees of public company boards of directors The audit committees have been subjected to new constraints on operating frameworks and committee composition ever since the passage of the Sarbanes-Oxley Act (Sherman, Cary & Brust, 2009). The audit committee is a subset of the Board of Directors. They are usually in charge of various monitoring functions including financial records, external auditors, regulatory compliance, internal controls and reviewing risk with the senior management team (p. 1). The audit committee has been impacted by the negative publicity emanating from the various financial...