Emergence of an Act - Analysis of Sarbanes-Oxley Act

Emergence of an Act

As a reaction to the corporate scandals; which included corporate giants such as Enron, Tyco International, Adelphia and Worldcom, which cost investors billions of dollars after the stock price of respective companies collapsed, deteriorated the public's confidence in USA's security markets.

Prior to the implementation of Sarbanes-Oxley act, various organization individually have been trying to reform their corporate governance guidelines. But these recommendations for change focused on characteristics that were visible to the outsiders, and were not related to what actually happens inside the board room. Boards were not clear of what their roles should be depending on the situation of their company, as in what the limitation of each board member is, when and how to tackle complex structural issues, and that they should work closely to discover efficient ways gathering and sharing the knowledge needed to carry out their tasks. As a result these recommendations had too little substantive effect on governance.

These organizations had been partly successful in reforming their corporate governance policies, but they weren't that effective, which still lead to huge corporate scandals such as that of Enron. The US senate in 2002 passed a ‘Public Company Accounting Reform and Investor Protection Act ' also known as the ‘Sarbanes-Oxley act' to regain investor's confidence in the security markets as well as prevent future corporate accounting debacles.

Analysis of Sarbanes-Oxley act

The Sarbanes-Oxley act contains 11 titles, each consisting of sections that define specific standards for financial reporting. Below are the titles of Sarbanes-Oxley act with their brief description.

1) Public Company Accounting Oversight Board (PCAOB)

This title states that PCAOB provide independent oversight of the auditors. Its further tasks include registering auditors, defining policies and procedures for compliance audit, inspecting and policing quality control, and ensure the compliance Sarbanes-Oxley act.

2) Auditor Independence

It establishes standards for external auditor, to limit the conflict of interest. It sets criteria and duration for selecting an auditor.

3) Corporate Responsibility

Sections under these titles states that senior executives take individual responsibility for the accuracy of the corporate reports.

4) Enhanced Financial Disclosure

Here the reporting requirements for financial transactions are defined to ensure the accuracy of the financial reports and disclosures.

5) Analyst Conflicts of Interest