Topics: Enron, Accounting scandals, Financial statements Pages: 10 (2256 words) Published: May 6, 2014

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Congress passed the Sarbanes-Oxley Act of 2002 in response to financial scandals perpetrated by Enron and WorldCom, and it has had a strong impact on corporate accounting and financial decision-making. This law was intended to enhance financial transparency for publicly-traded companies. The Sarbanes-Oxley Act established new regulations and penalties for public companies to protect investors. In addition, it created the Public Company Accounting Oversight Board, or PCAOB, which is in charge of overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. This new law has impacted accounting and financial decision-making because it requires senior management to be accountable for every financial statement issued by the company. Also, it has regulated how board members and auditors interact by reducing conflicts of interests by banning auditors from working with companies that they have personal interest in. Ethics plays an prominent role in accounting and financial decision-making because money and greed tends to corrupt people. Many companies can easily lose their reputations because of unethical practices, and laws such as the Sarbanes-Oxley Act provide an ethical framework of which to manage their activities. Why was the Sarbanes-Oxley Act needed?

The Sarbanes-Oxley Act of 2002 took effect at a period of tremendous trouble for corporate America. Following the collapse of Enron in late 2001, the Bush administration, the U.S. Congress, the Securities and Exchange Commission (SEC), and the stock exchanges proposed sweeping new rules to address what they saw as systemic failures in the governance, internal controls, and disclosure practices of public companies. In June 2002, seeking to determine whether or not fraud was rampant in public companies, the SEC ordered the CEOs and CFOs of the 945 largest publicly-traded companies to file sworn statements attesting to the integrity of the financial and other information contained in their SEC filings for that year. Meanwhile, numerous pieces of reform bills worked their way through both houses of Congress, going widely unnoticed until the landmark disclosure of a multi-billion dollar accounting scandal at WorldCom, Inc., one of the largest frauds in U.S. history. The wave of corporate scandals culminating in WorldCom propelled Congress and the White House to move. This resulted in the Sarbanes-Oxley Act of 2002 (SOX, the Act) passed both houses by overwhelming margins (423 to 3 in the House and 99 to 0 in the Senate). It was signed into law by President Bush on July 30, 2002, just 35 days after WorldCom’s announcement that it had overstated its revenues by at least $3.8 billion (later considered to have been at least $9 billion in 1999 alone according to an SEC statement). The Act consists of 11 main sections intended to improve corporate responsibility (“SEC/Sarbanes Oxley Changes”, 2006).

The Act also required the creation of the five-member Public Company Accounting Oversight Board (PCAOB) to register, oversee, regulate, inspect and discipline public accounting firms, including foreign audit firms whose audit reports are included in SEC filings, and persons associated with such firms. The SEC appoints the members of the PCAOB and has oversight and enforcement authority over it.

The PCAOB is charged with establishing and enforcing auditing, quality control, ethics and independence standards and rules for public company accountants. The SEC will not accept an audit report from an accounting firm that is not registered with the PCAOB. Thus, SEC reporting companies must hire the services of a registered public accounting firm. The PCAOB is funded by new fees imposed on publicly-traded companies based on their market capitalization – the fees range from as little as $100 for the very smallest companies to more than $1...

References: Holt, M. (2007, 30 November). The Sarbanes-Oxley Act: cost, benefits and business impacts. Available
SEC/Sarbanes Oxley Changes to Give Small Public Firms a Break. (2006, December 6). Retrieved from
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