Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

Tasha G. Duckett

ACC/561

February 22, 2016

Jared Jones

Sarbanes-Oxley Act of 2002

“United States regulators and lawmakers were very concerned that the economy would suffer if investor lost confidence in corporate accounting because of unethical reporting” (Kimmel, 2011).  The Sarbanes-Oxley Act of 2002 or SOX Act, a Federal Law of the United States. Passed by Congress and signed by President George Bush, on July 30, 2002, the Sarbanes-Oxley Act was created because the government needed to make stronger the rules and regulations especially when those in higher management must validate the honesty of a company’s financial statement. This paper will focus on the reason for the creation of the Sox Act. It will also look at the provisions of the Act and what changes have been made to regulate the accounting environment. Lastly, it will focus on the good and the bad effects the Act was implemented.

The SOX Act was needed and passed by Congress because of accounting scandals at companies such as Enron, WorldCom, and Arthur Andersen, which resulted in not only corporate but investor losses totaling billions of dollars. The effect of these monetary loses, caused by these companies, adversely impacted the U.S. financial markets as well as the trust that investors had in them. “The Sarbanes-Oxley Act mandates a wide-sweeping accounting framework for all public companies doing business in the US” (Sarbanes-Oxley-101.com, 2011). The SOX Act was named for the co-sponsors of the “U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH)” (Salberg & Company, 2015). As a result of the Act those in a leadership role must verify the accuracy of the financial data; also the consequences are more severe for any activity that is deemed fraudulent. The SOX Act also provides outside auditing firm’s greater independence when reviewing the accuracy of a company’s financial statement; the Act also increases the role of the board of directors as it pertains to company        overseeing. There are 11 sections to the Sarbanes-Oxley Act that the Securities and Exchange Commission or SEC enforce.

As stated above, the Sarbanes-Oxley Act consists of 11 provisions or sections. These provisions were put in place to protect the public from fraud that could be committed by a corporation. Listed below is a list along with a brief description of the 11 provisions of the Act.

• Public Company Accounting Oversight Board – established to oversee the audit of public companies.
• Auditor Independence – provides auditors with rules but also gives them the authority to decide if statements are up to code.
• Corporate Responsibility – those in upper management are responsible for the accuracy of the company’s financial statement.
• Enhanced Financial Disclosure – items that are not included on the financial statement must be disclosed.
• Analyst Conflict of Interest – if an analyst has a conflict of interest then it must be disclosed.
• Commission Resources and Authority – similar the provision above, this section also looks at how the SEC deals with companies and individuals who do not obey the laws they have set.
• Studies and Reports – looks at the ways in which the SEC develops reports as well as research companies.
• Corporate and Criminal Fraud Accountability – discusses the fines and penalties for providing fraudulent financial data as well as how the SEC protects those that report fraudulent behavior also called “whistle-blowers.”
• White Collar Crime Penalty Enhancement – looks at how the government handles white collar criminal activity.
• Corporate Tax Returns – The Chief Executive Officer signs the tax returns.
• Corporate Fraud Accountability – focuses on the federal government deals with corporate fraud (U.S. Securities and Exchange Commission, n.d.).

The changes that have occurred in the accounting regulatory environment since the Sarbanes-Oxley Act have been far and wide. “The primary changes resulted in the creation of the Public Company Accounting Oversight Board, the assessment of personal liability to auditors, executives and board members and the creation of Section 404” (Slaughter, 2016). This section, which did not occur until the creation of the Act, demands that companies have internal control procedures in place. For public companies, the inclusion of the company’s internal control report is now mandatory with its annual audit. Working in conjunction with the SEC, a board is in place with the duty of overseeing public accounting companies. Also, depending on the size of auditing firm they must undergo a review of their company every one to three years; and along with the reviews by the board, public accounting firms are now obligated to take liability for the audits they conduct.