SARBANES-OXLEY ACT 5
The of 2002, commonly referred to as SOX, underlinesan act that was passed by the United States Congress in an effort tosafeguard the investors from any likelihood of fraudulent accountingactivities by business entities. This Act mandated or outlined strictreforms so as to enhance financial disclosures from business entitiesand avert the possibility of accounting fraud or at least reduce thepossibility for its occurrence. This bill was put in place as aresult of varied major accounting and corporate scandals involvingbusiness entities such as WorldCom, Peregrine Systems, Adelphia,Enron and Tyco International among others. It goes without sayingthat the scandals had immense cost to investors going to billions ofdollars after the share prices pertaining to the affected companiescame tumbling down, thereby shaking the confidence of Americaninvestors in the United States securities markets. Needless to say,the scandals occurred simply because there was a gap in the laws andpolicies pertaining to the operations of the corporations especiallywith regard to their accounting practices. Named after its mainarchitects Paul Sarbanes and Michael Oxley, the Act not onlyintroduced fundamental modifications to the regulations of corporategovernance and financial practice but also set varied deadlines forits compliance (De&Argosy,2006).
SOXis arranged is arranged in 11 titles, with about six of them beingconsidered as some of the most fundamental. The first titleestablished the PCAOB, which would offer oversight over publicaccounting firms that offer audit services. It also defined theparticular procedures and processes for compliance of audits. Thesecond title established the standards pertaining to external auditorautonomy so as to restrict conflict of interests. It prohibitedauditing companies from offering non-audit services for the samebusiness entities (De&Argosy,2006).The third title mandated that the senior executives in any businessentity would take individual responsibility for completeness andaccuracy pertaining to the corporate financial reports, while thefourth title described the improved reporting requirements pertainingto financial transactions (Bauer,2009).This title also mandated that any material changes in the financialconditions or improved reviews by SEC be reported in a timelyfashion. The fifth title incorporates regulations that are designedin an effort to assist in the restoration of investor confidence insecurity analysts reporting. It outlines the codes of conductspertaining to these professionals and necessitates that any knowableconflicts of interest be disclosed (Bauer,2009).The sixth title outlines the practices of security analysts torestore the confidence of investors by defining the authority of SECto bar or censure security professionals while also outlining theconditions that an individual would be barred from operating as adealer, advisor or broker. The seventh title outlines and mandatesthe SEC and Comptroller General to carry out varied studies and filereports such as securities violations, enforcement actions, as wellas effects of public accounting firms consolidation among others. Theeighth title seems to be the most fundamental. Titled the Corporateand Criminal Fraud Accountability Act of 2002, it outlines theparticular criminal penalties pertaining to alteration, manipulationor destruction of financial records or any other interference withthe same (Anand&Wilkinson, 2008).Further, it outlines varied protections that are to be offered towhistleblowers. This is complemented by the ninth title, WhiteCollar Crime Penalty Enhancement Act of 2002, whichenhances the criminal penalties relating to white-collar conspiraciesand crimes while recommending enhanced sentencing and terming thefailure to certify the financial records of a corporate entity as acriminal offense. Further complementing it is the 11thTitle, CorporateFraud Accountability Act of 2002, whichidentifies records tampering and corporate fraud as criminaloffenses, while joining the offenses to particular penalties. Thistitle also gives the SEC the capacity to undertake temporary freezingof payments and transactions that are seen as unusual or large, whilerevising the sentencing guidelines and enhancing their subsequentpenalties.
Thereare varied specific requirements pertaining to the SOX. First, thisact requires that every financial report incorporate an InternalControls report, which would outline the accuracy of the financialdata and show that sufficient controls have been established so as toprotect the data. Further, A SOX auditor is mandated to review theprocedures, controls and policies, while the companies are requiredto have year-end financial disclosure reports (De&Argosy,2006).SOX auditing necessitates that the internal controls and proceduresbe audited using control frameworks, while the monitoring and logcollection systems have to offer an audit trail for all activity andaccess to confidential or sensitive business information (Anand&Wilkinson, 2008).Further, the promotes the disclosure of corporatefraud through offering protection to whistleblower employees incompanies that are publicly traded or even their subsidiaries.Indeed, Section 806 of this act gives the Department of Labor theauthority to offer protection to whistleblower complaints againstexecutives or employers who often retaliate, while also authorizingthe Department of Justice to charge individuals who retaliate withcriminal offense (De&Argosy,2006).
Whilethere may be varied opinions, it is evident that SOX has beenextremely effective in preventing fraud, fostering high qualityfinancial report, as well as good corporate governance. Indeed,research shows that SOX has resulted in significant improvement inthe scope, status and responsibilities of internal auditors (Anand&Wilkinson, 2008).The enhancement of the penalties has prevented accounting frauds,especially when complemented by the increased protection ofwhistleblowers.
Anand,S., & Wilkinson, J. (2008). TheSarbanes-Oxley act: An introduction.Zaltbommel: Van Haren Publishing.
Bauer,A. (2009). TheEnron scandal and the Sarbanes-Oxley-Act.München:GRIN Verlag.
De,V. D. L., & Argosy University. (2006). TheEffectiveness of the of 2002 in preventing anddetecting fraud in financial statements: A dissertation.Boca Raton, Fla: Dissertation.com.