In this paper the Sarbanes Oxley Act with particular reference to the section 404 is discussed in detail. We shall start the paper with providing background information to the Sarbanes Oxley Act, 2002. This section explores the environment that spurred the creation of the act and the need for such legislation. The second section provides an introduction to the Sarbanes Oxley Act section 404 which explores the provisions of Section 404. The next section on ‘Internal Controls Feature of section 404 of the Act’ provides an interpretation and the implication of internal control and the consequences that SOX 404 has on company affairs and the changes it has necessitated is discussed. The accounting profession and practice is affected by the provisions of SOX 404 and the future responsibilities and requirements of auditors and the possible difficulties are discussed in the ‘Auditing and the Impacts on Auditors’ section. While the normal functioning of the company and the provisions of the section is clear, The ‘Other unanticipated events’ section of the paper explores the unknown and un thought of difficulties that will be encountered as in the case of a merger and other transactions between firms which will be affected by the provisions is explored with illustrations. There are areas in the law regarding transactions like an acquisition of a company and the application of this act which is not certain and the result could be undesirable from the point of view of both the parties when the provisions of the section is mandatory to both. These issues are important and need be resolved at the earliest. The importance of IT cannot be stressed enough and the IT requirements that are a must in implementing the provision of the SOX act is explored I detail in the ‘Technology and system requirements’ section of the paper. A summary of the hallmarks of the discussion and opinions and arguments on the subject by eminent thinkers and views can be found in the ‘Criticism and Review’ and the Salient Features’ section. The paper ends with a ‘Conclusion’ drawn on the impact of the section inferred from the information presented in the paper.
Sarbanes Oxley Act of 2002: Background
The Sarbanes-Oxley Act came at the wake of a lot of scandals and apprehension and there was a lot of media pressure in its enactment that was caused by the collapse of Enron. This act provides stiff punishments for those at the helm of companies and fines of over $5 million for violation of the laws. (Snedaker, 2006) The act is named after senator Sarbanes and Oxley who are the architects of the act. Sarbanes-Oxley Act was meant to introduce regulation to corporate governance and financial accounting. The act brought in mandatory rules regarding the internal financial controls. (Romano, 2005) The Sarbanes Oxley act of 2002 was assented to by the President on 30th July 2002 and principally applies to the issues as stated in the securities act, that is public issues and companies with shares and securities subscribed by the public, and all companies with assets of over $10 million and all companies with over 500 security holders come under its purview. The public companies, investment and securities traders, foreign companies, and others that trade securities at the national securities exchange are bound by the law. (Sonnelitter, 2005) There was an opinion current even before passing of the act that auditing was performing at low standards in U.S. public companies, and following that there came the act to reform accounting which was the ‘Investor Protection Act of 2002’ and the ‘Public Company Accounting Reform’. The impact of the Sarbanes Oxley Act was more to form the Public Company Accounting Oversight Board -- PCAOB that would then enforce the earlier accounting act. The addition was the mandatory disclosure required. (Coates, 2007) The act has long term and far reaching consequences, not only in the governance...