What Is Sarbanes-Oxley Act 2002?

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Section 1: History of the Innovation

What is Sarbanes-Oxley act 2002?

This innovative act has forever changed the accounting profession.

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Remember these companies: WorldCom, Tyco, Waste Management, and Enron?

Yes, they became famous for using creative accounting techniques to inappropriately report their financial statements or in other words, “Fraud” committed by the upper-level management. All of these fraudulent scandals, especially Enron, shocked the financial world, which also had a huge impact on the New York Stock Exchange (NYE), one of the world’s largest financial markets. Not only people in United States, but also investors from around the world have invested in this equities-based exchange market. So with the continuous trend of fraud from big corporations like these in the United States, the confidence of the investors declined.

To prevent fraud and gain the public trust again, the congress decided to pass the Sarbanes–Oxley Act of 2002 (SOX) on July 2002 after the Enron scandal. It is the act that forever changed the accounting profession especially on the auditing side of things! This legislation has allowed the government to regulate, and monitor the accounting profession for auditing public companies, which once use to be self-regulated. However, the profession still allows self- regulation for auditing non-public companies. So with this result, the enactment has created unequal standards of the auditors to audit public and non- public entities. It also requires the auditors to know more rules and procedures to be able to apply in their jobs, bringing big controversy into the accounting area.

It has now been over 10 years since this act was established, and the controversy has dissipated when the professionals passed the learning curve and realized the benefits of it.  

Section 2: Currently practiced

Sarbanes-Oxley act of 2002 and PCAOB:

The principles of the operations

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        (Sarbanes-Oxley act of 2002)

PCAOB

                       (Public Company Accounting Oversight Board)

This section will only focus about the general purpose and processes of the innovation of the independent Public Company Accounting Oversight Board or PCAOB because they are the key player in the function of SOX.