The Sarbanes-Oxley Act of 2002 - Managerial Acconting

Sarbanes-Oxley Act of 2002

Managerial Accounting

August 23, 2011

Introduction

More than half of the American households invest in publicly held companies (Olson, 2006). The American people that invest in these publicly held companies expect these companies to operate ethically, and in the best interest of the public. With the collapse of companies such as Enron and WorldCom due to financial transgression, Congress and the Bush administration felt the need for more oversight of publicly held companies. The Sarbanes-Oxley Act of 2002 gave congress and the Bush administration the much need oversight for publicly held companies. This paper will cover the Sarbanes-Oxley Act of 2002, the impact of the act, the cost benefits, and pros and cons of the act.

Sarbanes-Oxley Act of 2002

On July 30, 2002 the Bush administration signed into law the Sarbanes-Oxley Act 2002. The act was a bipartisan legislation created by Sen. Paul Sarbanes, D-MD, and Rep. Michael G. Oxley, R-Ohio. The act is an anti-corporate fraud law that was put in place to combat unethical companies such as Enron and WorldCom. The Sarbanes-Oxley Act 2002 effected 150,000 U.S companies, 1,200 non US companies and 1,423 accounting firms. The bill also appropriated a $312 million increase to the SEC budget to help roll out the bill (Jost, 2002). The Sarbanes-Oxley Act did not change the guidelines for auditing. Public Companies and auditors continue to follow GAAP guidelines for accounting and auditing. The Sarbanes-Oxley Act enhances corporate responsibility, enhances the financial discloser, and created the Public Company Accounting Oversight Board (PCAOB).

The Sarbanes-Oxley Act enhanced corporate responsibility by holding companies financially and legally responsible (Haggerty, 2011), and increased regulations on auditing firms. The Sarbanes-Oxley Act holds the chief executives personally responsible for company wrongdoings. Chief executives must certify that all financial reports are accurate (Haggerty, 2011). If financial paperwork is inaccurate the chief executive can be fined, as well as the company. Deliberately filing false financial reports can be considered scheme or artifice which is “defrauding shareholder or to obtain money or property in connection with security fraud” (Haggerty, 2011). In the case of scheme or artifice the punishment for a chief executive is up to 25 years in prison, up to $5 million in fines, and a stock market delisting for the company (Haggerty, 2011). The act of distorting paper or tampering with paper is also punishable with a 20 year prison sentence (Jost, 2002). By the Sarbanes-Oxley act implementing strong fines and penalties for chief executes in companies, it should