Table of Contents
Introduction to Sarbanes Oxley
Post-SOX Fraud Cases
Analysis of Effectiveness
Introduction to Sarbanes Oxley
As scandals of Enron, Tyco, WorldCom and others shocked the world, it was clear some type of regulation was needed to restore trust in the financial institutions. These scandals cost investors billions of dollars and hurt America’s confidence in the financial markets. On July 30, 2002, President Bush signed the U.S. Sarbanes Oxley Act of 2002. This Act introduced significant changes in both management’s reporting responsibilities and the scope and nature of the responsibilities of the auditor. Bush stated that it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." In understanding Sarbanes Oxley and the effect it has on business one has to look at what new standards it sets, the benefits, and how effective the act is on fraud prevention. After closely examining the positives and negatives, it is clear that Sarbanes Oxley is not effective. In the months following the Enron scandal, many proposals were being made in Congress to address the current state of America’s financial institutions. The Sarbanes Oxley Act of 2002, also known as SOX, was named after its sponsors, Maryland Senator Paul Sarbanes and Ohio Representative Michael G. Oxley. SOX combined the two separate proposals of the two senators and the Senate started debate on the Sarbanes’ bill on July 8. The negotiation continued over the weekend of July 20 and in a radio address on Saturday, July 20, President Bush urged Congress to pass a final bill before the fall recess. Eventually, SOX was approved by the House by a vote of 423 in favor and 3 opposed. In the Senate, the bill was approved with a vote of 99 in favor and 1 abstaining. The implementation of SOX started soon after its passage, August 14, 2002 was the first deadline for CEOs and CFOs of the 947 largest firms to certify the truthfulness of their financial reports (Day). As directed by SOX, the SEC started rulemaking activities in late August 2002. Another important topic that relates to SOX is the issue of internal controls. Section 404 of Sarbanes-Oxley is one of the most significant reform provisions of the Act, as it requires a publicly traded company to develop, document, and test internal controls periodically that are intended to prevent fraud in financial reporting (Day). The importance of internal control and the need for internal control standards is longstanding (Kinny). Two dimensions are considered when assessing a deficiency in internal control, the likelihood of a misstatement and the significance of that potential misstatement (McVay 138). However, leading up to the financial scandals of Enron and WorldCom actual standards in place were somewhat limited in scope (Geiger 2003). Prior to SOX, the Foreign Corrupt Practices Act of 1977 (FCPA) was the only statutory regulation to address internal controls (McVay 139). Basically, SOX does not change the requirements for internal control over what was required in the FCPA. However, SOX does mandate new assessments and disclosures of internal controls.
In understanding the effectiveness of SOX, you have to look at the new rules that it will implement. SOX contains eleven titles that describe specific mandates and requirements for financial reporting. The first title, Title I, consists of nine sections and establishes the Public Company Accounting Oversight Board (PCAOB). It is also considered to contain the most fundamental parts of SOX (Hamilton 21). The board is empowered to set auditing, quality control, and ethics standards. It also has the power to inspect accounting firms and investigate violations (PWC 5). However, the actions of the...
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