Primer on Sarbanes Oxley
What is the Sarbanes-Oxley Act and why was its enactment necessary?
The Sarbanes-Oxley Act was enacted on July 2012 under the administration of President George W. Bush. The passage of this law was a reaction to a number of major corporate and accounting scandals that included Enron, Tyco International, WorldCom and Adelphia. What the myriads of corporate scandals have in common was skewed and questionable reporting of financial transactions that cost investors billions of dollars. Stock prices of these companies collapsed and questioned the confidence of the independent auditors and the Securities and Exchange Commission (SEC) were questioned. Commonly referred to as Sarbox or SOX, the Act was named after the two legislators who sponsored the bill, Democratic Senator Paul Sarbanes and U.S. Republican Representative Michael Oxley. SOX set stricter standards for publicly traded companies and public accounting firms including a requirement for the CEO and CFO to individually certify the accuracy of the audit reports and other financial information. SOX increased the oversight on independent auditors and dramatically changed the relationship with their publicly held clients. In response to global implications over business transactions by US companies doing business internationally, higher level of accountability and transparency standards were implemented. Similar guidance and laws were promulgated worldwide like Japan, Germany, France, Italy, Australia India, South Africa and some other countries where U.S. international companies transact business (Lyons, 2010). The creation of the Public Company Accounting Oversight Board (PCAOB)
The availability of properly audited and current financial reports enables investors to make informed and rational choices about whether to invest in a particular company. The 1980s was a time where many corporate misbehaviors and takeovers cost many people their jobs. The Treadway Commission, named after the organizer James C. Treadway, Jr., took the lead in examining the factors why companies misbehave and made recommendations to reduce fraudulent financial reporting. A group of private sectors in the accounting profession volunteered to carry out the goals of the Treadway Commission. This led to the formation of the Committee of Sponsoring Organizations of the Treadway Commission, also known as COSO (Arens, Elders, & Beasley, 2010). COSO was the venue in driving the swift passage of SOX. SOX established the Public Company Accounting Oversight Board (PCAOB) under the oversight of the Securities and Exchange Commission (SEC). The board is charged with the responsibility of overseeing and disciplining independent accounting firms in their role as auditors for public companies. The board has oversight on the implementation of stricter corporate governance, more disciplined exercise of auditor’s independence, enhanced audit reporting, more frequent review of control risk assessments and more informative report disclosures. Under the Sox, the SEC required firms to register with PCAOB to monitor strict compliance of SOX standards in the manner by which public accounting firms conduct their audit, thus avoid further breakdown in the implementation of auditing standards. The PCAOB also requires that public accounting firms auditing more than 100 issuers are inspected every three years. Key ethical components of SOX and Ethics
Under the direction of SOX, the Securities and Exchange Commission released the ruling on the code of ethics provisions of the Sarbanes-Oxley Act under Section 406. The rule applies to entities required to file with the SEC under the Securities Act of 1934 including non-U.S. private issuers. As noted in the scholarly article on “Ethical Guidance and Constraint Under the Sarbanes-Oxley Act of 2002” (Orin, 2008), written codes of ethics are but substitutes for a person’s ethical instincts and ethical training. The code of ethics as...
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