The Sarbanes-Oxley Act of 2002 was created by sponsors U.S. Senator Paul Sarbanes(D-MD) and U.S. Representative Michael G. Oxley (R-OH) in response to very public corporate fraud and accounting scandals. In a seemingly short period of time, Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom all collapsed. The majority of these scandals resulted from the inaccurate reporting of financial transactions. The financial statements of these organizations were so gravely misrepresented and misstated that once the organizations' records were presented fairly, it caused the total collapse of the company. As a result of these scandals, investors lost billions of dollars when the share prices collapsed, and the public lost confidence in the nation's securities markets and the auditor who were supposed to protect the public's interest.
The Sarbanes-Oxley Act applies to all public companies in the U.S. and international companies that have registered equity or debt securities with the Securities and Exchange Commission as well as the accounting firms that provide auditing services to them. The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures, combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The Sarbanes-Oxley Act also created new penalties for acts that were unethical, negligent or fraudulent. It hoped to change how corporate boards and executives interacted with each other and with corporate auditors. Its aim is to remove the defense/excuse of "I wasn't aware of or didn't know about the financial issues regarding the company" from CEOs and CFOs. It aims to hold management accountable for the accuracy of the financial statements in order to protect the shareholders and others that rely on those financial statements. The Act also specifies new financial reporting responsibilities, including adherence to new internal controls and procedures designed to ensure the validity of their financial records.
All of the components of The Sarbanes-Oxley Act of 2002 were designed to ultimately bring about reform in financial reporting, accountability, and auditing. The Act requires transparency through ensuring real time disclosure of information, the adherence to guidelines of the Generally Accepted Accounting Principles, and by providing full financial details of all the transactions not mentioned in balance sheet. The Act also expands the disclosure of financial and non financial control measures in every company. Public auditors also face increased regulatory controls from the Securities and Exchange Commission and the then newly formed the Public Company Accounting Oversight Board for this purpose. In addition, public certification of these internal controls and financial measures also were all in an attempt to reform the way in which public companies and accountants conducted business or they would face fines or punishment/imprisonment or both. Yet, in the ten years since the Sarbanes-Oxley Act has been introduced, it has been somewhat effective in minimizing corporate fraud and protecting investors and minimally effective in the enforcement and penalty portion of The Act.
In the ten years since the Sarbanes-Oxley Act has been introduced the instances of large, public corporate fraud scandals have been reduced. The instances of public corporate fraud have been reduced because Sarbanes-Oxley changed a norm of the business environment that allowed executives to buy and sell company shares without oversight or transparency and it has placed additional regulations to make executives accountable if they are engaging in other types of financial reporting fraud.
In the mid to latter part of the 1990s, senior executives executed part of the market collapsing part of the fraud that prompted Sarbanes-Oxley by "buying" up the company stock options at...
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