A Primer on Sarbanes-Oxley
By Doris Bonga
This paper identifies issues, activities and practices, in financial reporting by public companies that were sanctioned by the Sarbanes-Oxley legislation Act of 2002 (SOX). This act was passed with the intent to restore public confidence and increase transparency in financial reports of publicly held companies, due to the aftermath of the financial scandals that plagued companies such as Enron and Worldcom (Jennings, 2012). The problem to be investigated is the ethical issues that were legislated by SOX, the cost associated with the implementation of the new act on different stakeholders, and new governance practices required of public companies to insure compliance with the new act.
SOX was implemented in 2002 as “an act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes” (Jennings, 2012, p. 212). This act focused primarily on the independence of auditors who are responsible for auditing public companies, the corporate responsibilities of Chief Executive Officer(CEO) and Chief Financial Officer(CFO), the proper disclosure of financial statements, the conflict of interest between the parties involved, criminal fraud accountability of those involved, and the imposition of the penalty in case of violations. The Public Accounting oversight Board (PAOB) was then created to enforce all the issues identified under the above act (Jennings, 2012). This legislation was imposed on employees of public companies who are responsible for disclosing financial statements. Although this legislation seemed new, it can be argued that all the issues addressed could have been covered by enforcing already existing code of ethics within any of these organizations.
Violations in the SOX legislation that could have been voluntarily resolved as ethic issues
In order to reduce the incidences of fraud in financial reporting of publicly held company, the PAOB was given the authority to regulate activities of CEO, CFO and auditors who are responsible in preparing and certifying financial records. The new legislation requires public accounting auditors to be independent from the operations of the company they are auditing. This requirement is not new as it is a basic requirement from all accounting firms to be independent of all activities of the corporation they are auditing. This concept of independence is the foundation of the profession of public accounting. It is based on the belief that auditors should be independent in facts and appearance in order to minimize outside pressure that may be imposed by clients who hired them. Lack of independence can impair their judgment on the accuracy of the financial statements being audited. This concept also inspires confidence in the quality of the financial statements audited by the public who have interest in them (Previts & Merino, 1998). It can be easily concluded that there is a potential conflict of interest if a work is performed and then audited by the same party. In this case, the stakeholders cannot be assured of the validity of the report. The legislation by PCAOB applicable to the auditor’s independence was not necessary if the public accounting firms and the companies involved had adhered to the auditors’ professional requirements.
The legislation with the issues of corporate responsibility, financial disclosures, and conflicts of interest in general could have been prevented if the leadership of the companies involved exercised their moral responsibility in their role as managers. Moral responsibilities include honesty, transparency, respect and fairness. It may also include factors such as excellence in the conduct of business, profitability and others. Davis, Schoorman, & Donaldson (1997) define stewardship as a higher level of duty of...
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