Sarbanes-Oxley Act of 2002

Module 09: Accounting Capstone Project – Sarbanes-Oxley Act

Accounting Capstone – Rasmussen College

Jessica N. Ramos

        Signed into law by President Bush on July 30, 2002 and named after Senator Paul Sarbanes and Representative Michael Oxley, the Sarbanes-Oxley Act introduced significant revisions to corporate governance and the regulation of financial practice. The act was implemented in response to a series of high-profile financial scandals that occurred in the early 2000s at companies including Enron, WorldCom and Tyco that jarred the confidence of investors. The Sarbanes-Oxley Act also affects IT departments of corporations by defining which records should be stored and for how long. According to the U.S. Securities and Exchange Commission, SOX states that all business records, including electronic records and electronic messages, must be saved for "not less than five years." All public companies are required to comply with SOX. If noncompliant, repercussions are fines, imprisonment or both.

        The Sarbanes-Oxley Act dramatically affects the accounting profession and influences any CPA actively working as an auditor of, or for, a publicly traded company. There are several implications for accountants, including the following:

• Made up of five full-time members and appointed and overseen by the SEC, the Public Company Accounting Oversight Board oversees and investigates the audits and auditors of public companies, and sanction both firms and individuals for violations of laws, regulations and rules. All accounting firms that audit public companies must register with the Board and pay annual fees and registration.
• Instead of management, auditors must be overseen and report to an audit committee. The audit committee must be reported to by its auditor with any new information, such as: Alternative methods of financial information within GAAP being discussed with management, and any friction in communication between the auditor and management.
• Failure to maintain all audit or review workpapers for at least five years is a felony and can result in penalties of up to 10 years in prison. The rule covering the retention of audit records is established by the SEC while, the Board, issues standards that enforce auditors to keep other documentation for seven years. Anyone responsible for the destruction of documents involved in a federal or bankruptcy investigation will face a felony charge with penalties of up to 20 years.
• Every public company audit reports must be reviewed and approved by a second partner. Audit reports must contain a description of assessments made by management of the Internal Controls. This description must also include a specific notation regarding any major defects or material noncompliance found on the basis of such testing.
• As an auditor, it is unlawful to provide certain services to a publicly held company. Bookkeeping and appraisals are on this list of unlawful services. As well as information systems design and implementation, actuarial services, and internal audits. Management and human resources services, broker/dealer and investment banking services are also unlawful if provided by an auditor.  In the circumstance that a tax service, usually viewed as traditional, is composed as an “expert” service, the Board or the SEC may be encouraged to understand the importance of auditors providing tax services for publicly held audit clients. CPAs working in the financial management areas of public companies need to be aware of the new responsibilities of CEOs and CFOs, who are now required to certify company financial statements. Now with the responsibility of communicating and coordinating with corporate audit committees, CEOs and CFOs are responsible for hiring, supervising, and compensating the independent auditors. With new requirements regarding enhanced financial disclosures, the AICPA is working to broaden resources specifically tailored for members in corporate practice.

The Sarbanes-Oxley Act does not require proactive fraud prevention efforts, but has encouraged many companies to improve upon their internal controls, in turn, pushing them in a direction of better fraud prevention. Therefore, while I do feel the Act has encouraged companies to move toward a more streamlined and ethical corporate culture enhancing fraud prevention, I do not feel the Act has directly prevented fraud.