Sarbanes-Oxley Act

Public companies have been fundamental entities and have played immense
roles in enhancing the economic wellbeing of the United States. Indeed,
they have been contributing immense amounts of funds to the public
coffers in terms of taxes, and even offering employment to a large
number of people, among other roles. Needless to say, these business
entities are primarily required to be transparent and accountable in all
their operations (Ambler et al, 2006). Unfortunately, recent times have
seen an increase in the cases of fraud and high-profile corporate
crimes. These cases not only result in loses for investors but also
cripples economic growth. Numerous legislations have been crafted in an
effort to curb these crimes, one of which is the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act established new auditing and accounting
procedures, as well as public oversight, and incorporates some enhanced
criminal and civil penalties for violations of SEC and criminal fraud.
Indeed, the act was a key component of the response of the United
States’ Congress to the shenanigans plaguing the corporate America and
aimed at reaffirming the fundamental responsibility of the senior
management and Board of Directors for any misstatements pertaining to
the company’s SEC filings and enhancing the penalties pertaining to
securities fraud (Ambler et al, 2006). Section 302 of the Act expanded
the scope of the CFOs and CEOs’ accountability through giving them the
personal responsibility of certifying the financial reports of the
companies, their disclosure procedures and controls, while levying
immense fines and possible jail terms for violations.
Effectiveness of Sarbanes-Oxley Act in curbing corporate fraud
The Act has been extremely effective in protecting investors, as well as
improving reliability and accuracy of corporate disclosures through
imposing strict rules on auditors and audits of publicly traded
companies, increasing the penalties levied to companies for white collar
crimes associated with investor fraud, requiring companies to implement
strict internal controls and hindering insider deals and trading
(Greene, 2003).
SOX audits have promoted transparency and ensured sufficiently reliable
financial reporting. Indeed, they have uncovered numerous material
weaknesses in the internal controls, thereby increasing the number of
financial restatements. Disclosures and correctives driven by the SOX
have inspired increased investor confidence, as well as ultimately
supporting a considerably more efficient process of allocating capital
(Greene, 2003).
In addition, the likely consequences pertaining to failed SOX audits
have motivated companies to uphold a higher corporate governance and
quality transaction controls that would otherwise not have existed.
These consequences particularly applied to the cost of capital
especially considering that compliance failure would affect borrowing
rates, stock prices, as well as bond ratings (Greene, 2003). This fear
of failure gives investors some extra assurance.
In addition, the aspect of maintaining wide-ranging documentation
pertaining to internal controls as required in SOX section 404
encourages better regulation mindset in the accounting staff, which may
sometimes result in the streamlining and rationalization of the control
process. On the same note, SOX reviews forces auditors and companies to
emphasize on the control environment, as well as its continuing
persistence (Holt, 2008). Section 404 includes process assessment to the
conventional account validation, while holding the management, as well
as their public auditors more accountable. Indeed, scholars have also
noted that SOX documentation comes as an incredible training tool for
new personnel, while also serving not only as a disaster recovery backup
but also a technique for the communication of information pertaining to
internal control to individual who have the responsibility for executing
it.
In addition, the Act introduces dramatic modifications in the corporate
world especially with regard to the introduction of new tools of
enforcement that would punish corporate wrongdoers, as well as prevent
corporate fraud (Holt, 2008). Underlining the effectiveness of the Act
is the fact that the SEC by 20th August 2003 had filed 543 enforcement
actions with 147 of them revolving around reporting violations and
financial fraud. At this time, the Commission aimed at barring 144
corporate executives and directors that had engaged in corporate fraud
from holding positions in publicly traded companies (Greene, 2003). Of
particular note is the fact that the commission does not only hold the
companies that engage in fraud but also other players. For instance, the
Commission has shown its willingness to pursue managers who exhibit
recklessness in management oversight, and has come up with strategies
that will exploit the Act’s creative provisions to return funds
recovered to investors who have lost in cases of fraud rather than
collecting the funds for the government (Holt, 2008).
However, the Sarbanes-Oxley Act may be improved by implementing the
recommendations incorporated in SEC’s report in 2006 requiring that
the PCAOB amends AS2 so as to offer a cost-effective relief to small
companies, incorporate testing to only find material weakness, as well
as integrate financial statement audit and internal control (Ambler et
al, 2006). In addition, the commission urged PCAOB to guarantee that
public audit firms have this relief in the reviews of internal controls
of companies.
Impact on auditing firms and public accounting firms
The effectiveness of Sarbanes-Oxley lies on the effects it has on the
auditing and accounting industry. Prior to the enactment of the
Sarbanes-Oxley, public companies’ outside auditors would develop
lasting relationships with the company management thereby allowing for
the overlooking of discrepancies in its financial reports. Moreover, the
auditing and accounting firms would provide numerous services to public
companies without complying with the SEC auditor independence rules
(Anand & Wilkinson, 2008). The entry of the Sarbanes-Oxley Act and rules
pertaining to auditor independence requires publicly traded companies to
establish autonomous audit committees that would undertake the
appointment, compensation, as well as oversight of external company
auditors (Bloomenthal, 2002). In this case, the public company managers
do not have working relationships with outside auditors, in which case
the outside managers would no longer offer consultation with public
companies pertaining to the production of their financial statements.
This results in a reduction of the capacity of the management to control
its financial statements or external audit, while strengthening external
auditor independence.
The accounting profession: Self Regulation or government regulation.
Needless to say, the accounting profession plays a crucial role in
enhancing transparency and accountability among public firms. Indeed,
accountants and auditors strive to ensure that the financial statements
of companies are a reflection of the true and accurate financial
position of the company (Bloomenthal, 2002). While this is the case, it
would be better that the profession is regulated by the government as
far as the firms’ capacity to detect, as well as report corporate frau
id concerned. This is especially considering that a large number of
corporate fraud involve collusion between the management of the
companies and their auditors, where they would overlook discrepancies in
the companies’ accounts, thereby fleecing the public and the
investors.
Prediction on Trends of Corporate Fraud
While there may be varying opinions as to the trends that corporate
fraud would take, it is evident that the future will see a reduction of
the same. This is especially considering the controls that it puts with
regard to the relationship between auditors and the management of the
public companies, the increased penalties levied to curb such crimes, as
well as the protections that are offered to whistleblowers (Bloomenthal,
2002).
Of particular note are the provisions of Section 806, which states that
states that whistleblowers who offer information pertaining to any
conduct that they reasonably believe to constitute fraud would be
protected, whether or not such fraud is actually taking place. This
protection is not only extended when such information is offered to law
enforcement agencies but also in instances where it is offered to
individuals with supervisory authority over such employees. The strong
protections that are provided to whistleblowers encourage or foster
reporting without any fear of reprisal (Bloomenthal, 2002). Companies,
on the other hand, are required to undertake through investigations
pertaining to reports from whistleblowers as an activity of controlling
fraud. Of particular note, in this case, would be the fact that the
failure to act on reports given by whistleblowers would be a violation
of reporting requirements in section 302 and provisions pertaining to
internal controls in section 404 (Holt, 2008). Even in instances where
the management believes that the whistleblowers’ reported belief
pertaining to possible fraud is unreasonable, they are still required to
undertake an extensive investigation so as to support its evaluation of
the situation. This is the only way in which the company or the
management would have a basis for the rejection of the report given by
the whistleblower as unfounded (Anand & Wilkinson, 2008).
In addition, the SOX has resulted in extensive investigations, which
have revealed a large number of audit firms that have not been following
the appropriate standards. Stiff penalties have been levied with the SEC
calling for the banning of these firms, an action which is bound to
enhance internal controls and transparency in the accounting industry
and the public companies.
References
Holt, M. F. (2008). The Sarbanes-Oxley Act: Costs, benefits and business
impacts. Amsterdam: Butterworth-Heinemann.
Ambler, D. E., Massaro, L., Stewart, K. L., Acre, J. W., & Kirkpatrick &
Lockhart Nicholson Graham. (2006). Sarbanes-Oxley Act: Planning &
compliance. New York: Aspen.
Greene, E. F. (2003). The Sarbanes-Oxley Act: Analysis and practice. New
York: Aspen.
Anand, S., & Wilkinson, J. (2008). The Sarbanes-Oxley act: An
introduction. Zaltbommel: Van Haren Publishing.
Bloomenthal, H. S. (2002). Sarbanes-Oxley Act in perspective. St. Paul,
MN: West Group.
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