The Sarbanes-Oxley Act of 2002
BUS 591: Financial Accounting & Analysis
Professor Susan Ayers
March 26, 2012
The Sarbanes-Oxley Act of 2002
Prior to 2002, there was very little oversight of accounting procedures. Auditors were not always independent and corporate government procedures and disclosure provisions were inadequate. Sometimes, executive compensation was tied to the stock of the company which created an incentive to manipulate the stock price by using fraudulent accounting practices to make it look like companies were making more money than they actually were. The Sarbanes-Oxley Act of 2002 was introduced because of the collapse of several major corporations due to these practices. This paper will discuss the main objective of The Sarbanes-Oxley Act of 2002, and point out key components to the act. It will also go through a few of the different criticisms from various individuals that have surrounded SOX since it was enacted. The paper will also talk about the positive and negative economic consequences of the act. Lastly, there will be a discussion on whether or not SOX has succeeded in achieving its goals and has become successful in the past decade.
The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, was a bill written: To improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes (Sarbanes et al., 2002, p. 1-2).
Prior to the act, there were structural and systemic weaknesses in the transparency and quality of financial reports. “After numerous corporate scandals came to light in the early 2000s, Congress addressed this issue by passing the Sarbanes-Oxley Act of 2002 (SOX)” (Kimmel, Weygandt & Kieso, 2011, p. 337). This bill was created for the auditing of public companies only. Its intent is to provide more confidence in the financial reports for investors by requiring internal controls of financial reporting to ensure accuracy. “The bill also requires steps to enhance the direct responsibility of senior corporate management for financial reporting and for the quality of financial disclosures made by public companies” (Sarbanes et al., 2002, p. 2).
SOX is broken down into various titles and sections that range from adequate financial reporting and corporate oversight to criminal penalties to comply with the law. Although there are many sections in the act, the key components are: Public Company Accounting Oversight Board (PCAOB), auditor independence, corporate responsibility, enhanced financial disclosures, analysts conflict of interest, corporate and criminal fraud accountability, and corporate fraud and accountability.
Title I - Public Company Accounting Oversight Board (PCAOB)
Prior to SOX, the accounting profession was mostly self-regulated. SOX - Title I is the PCAOB, which accounts for the new federal oversight board. There are three distinct components which comprise Title I. Authors McCauley Parles, O'Sullivan & Shannon (2007, p. 38) list them as: (1) registering and discipling accounting firms that prepare audit reports for public companies; (2) establishing audit and accounting standards; and (3) conducting inspections and investigations of registered accounting firms that audit public companies. “When violations of the Sarbanes-Oxley Act or PCAOB rules are found, the PCAOB may impose sanctions as severe as revoking a ﬁrm’s registration or...
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