Sarbanes & Oxley Act

Sarbanes & Oxley Act.

Author: Tony

Tony’s Business Series.

Introduction.

             In 2002, the Sarbanes-Oxley Act was enacted by the US congress. It is a federal law that applies only in the USA. It establishes (and also augments) regulatory standards that must be adhered to by all public accounting and management firms; and company boards. This act requires the management team of a public company to verify the exactitude of their financial information. Moreover, this act has strengthened and augmented the supervisory powers of the board of directors. Apart from exacting severe punishments for financial fraud; the Sarbanes-Oxley Act has also amplified the independent powers of external auditors, who will thus be able to carry out a stringent assessment of corporate financial statements (Keiso, 2011).

The act has 11 sections which are designated as follows: Corporate and criminal fraud accountability, analyst conflict of interests, PCAOB (Public Company Accounting Oversight Board), corporate responsibility, corporate fraud accountability, studies and reports, auditor independence, enhanced financial disclosures, corporate tax returns, commission resources and authority, and white collar crime penalty enhancement. The SEC (Securities and Exchange Commission) is obligated to oversee and ensure that there is compliance with the act. Moreover, the act led to the creation of the pseudo-public agency, the PCAOB (Public Company Accounting Oversight Board), which is entrusted with regulatory, supervisory, inspective and disciplinary roles, in order to ensure that accounting firms comply with the act, and also maintain integrity in their operations (Keiso, 2011).

The enactment of the act was received well by its proponents, but it was cautiously disapproved by its opponents. Proponents stated that the act promotes integrity, accountability and transparency in financial firms, because the firms understand that the veracity of their statements would be scrutinized and any instance of financial irregularities would be severely punished. Opponents stated that the intricacy of the act harmed the competitive advantage of the American financial industry, since the intricate regulatory framework of the act would reduce transactions and consolidation of the US financial market (Keiso, 2011).

Sarbanes & Oxley Act and corporate fraud.

One of the main objectives of the Sarbanes & Oxley Act is to minimize corporate fraud and thereby protect investors. This has the effect of promoting investor confidence in the financial market. The act aims to promote, strengthen and protect corporate governance, accountability and transparency. Section 302 of the act ensures that the CEO (chief executive officer) and the CFO (chief financial officer) of a company are held liable for the information presented in the financial statements of that company (Koehn, 2011). This ensures that the CEO and the CFO verify the exactitude of their financial statements before presenting them to the public. This has prevented instances whereby the management team of a company deliberately presented falsified financial statements to the public.

Moreover, the enactment of the act forced public companies to accurately reorganize their financial books. Hence, it is evident that the act has averted falsification of financial statements, and this has protected the investors, since the investors are able to assess the correct financial health of a company prior to making an investment (AHA, n.d).

The act also dictates the precepts of the professional relationships between the corporate boards and the financial auditors. Section 201(designated as services outside the scope of practice of auditors) of the act prohibits auditors from entering into consulting contracts with the company they are supposed to audit. This has enabled the act to avert a situation similar to the collapse of Enron where it was revealed that the corporate board members of Enron and the auditors colluded in conceiving and sustaining financial malpractices in the company. This act therefore ensures that internal auditors maintain professional integrity (and thus avoid colluding with errant managers). Moreover, the act gives the external auditors power to inspect the financial statements of a company (Koehn, 2011).

Title VIII of the act clearly delineates the penalization of criminal activities such as altering financial documents, engaging in securities fraud and defrauding the investors of a public company. Moreover, it reassesses the federal ruling guidelines for extensive criminal fraud and the obstruction of justice. The stipulations of this title also protect employees who providing incriminating evidence of fraud in a public company. The overall effect of Title VIII is that it has promoted integrity, professionalism, accountability, transparency and whistle-blowing in public companies. Financial experts states that the provision promoting whistle-blowing has enabled federal authorities to discover numerous frauds in public companies, as employees are no longer afraid (of intimidation and retribution from their superiors) to come forward with incriminating evidence of financial malpractices and corporate fraud in their companies (Keiso, 2011). This is the case with Value Line where a fraud involving about $ 24 million was uncovered when the chief quantitative strategist discovered the fraud and reported it to the relevant federal authorities. The above information clearly demonstrates the effectiveness of regulations of the Sarbanes & Oxley Act in minimizing corporate fraud and protecting investors. Thus, the financial reports inspire confidence among the investors.

The Public Company Accounting Oversight Board, (PCAOB) regulatory body oversees public companies’ compliance with the Sarbanes & Oxley act. However, partisan interests may influence the appointment of its members. The statement hereafter is a suggestion for improvement of the act. The act should include a clause that outlines that members of the PCAOB are to be appointed by the US president.

Impact of the Sarbanes & Oxley Act.

The Sarbanes & Oxley Act has had a significant impact on auditing firms and the public accounting professions. These impacts are assessed hereafter. First of all, the implementation of this act has increased auditing costs. Also, it has led to a boom in financial consulting. Thus, compliance with this act has increased the amount of profit that has been realized by auditing firms. For instance, the major four auditing firms (KPMG, Deloitte & Touche, PricewaterhouseCoopers, and Ernst & Young) have been able to realize massive profits amounting to hundreds of millions of dollars since the enactment of this act. Moreover, the increased need of auditing of public companies means that more public accounting professions need to be employed in order to manage the increased workload. Hence, it can be inferred that compliance with this act has created employment opportunities in the field of public accounting (Keiso, 2011).

The act stipulates several requirement of record-management. Thus, the act has increased instances of professional record-management in businesses. This has created employment opportunities for accountants and auditors (specifically, internal auditors). Moreover, increased record-management workload has forced companies to increase the amount of salary they pay their accountants and internal auditors (Koehn, 2006).

Enactment of the act has promoted, strengthened and preserved the integrity of auditing firms. Title II (designated as auditor independence) has enabled auditing firms and the public accounting profession in general, to discharge their duties in a professional manner, while adhering to the highest ideals of ethical standards in the financial industry (Koehn, 2006).

Government regulation of the accounting profession.

The accounting profession is better off being government regulated, with regards to the ability of a firm to detect and report corporate fraud. Multiple corporate scandals have shown that self-regulation of public firms is ineffective, and at best complacent with fraud. Moreover, self-regulation has the following disadvantages: conflict of interest, under-enforcement of the recommended regulations, inadequate sanctions, global competition (which attenuates self-regulation as stringent self-regulation may hinder the firm from asserting its competitiveness in the global market) and insufficient resources for implementation of self-regulation. Government interventions and action through reformed regulatory frameworks are necessary to improve auditing, reinstating financial discipline and punishing corporate fraud. Moreover, government regulation is effective since the government financial regulatory agencies have capabilities of formulating the appropriate regulatory policies, enforcement capacities and the power to oversee and ensure that businesses comply with the stipulated regulations. Moreover, the government can act as an analyst, in order to assess and identify unique business operation circumstances, and then deploy the appropriate configurations of regulatory standards, institutions and enforcement practices. Furthermore, the government comprehension of the effects of different regulatory actions enables it to assess the appropriateness of the applied policy criterion. Finally, government regulations apply to the whole country (Keiso, 2011).

Prediction.

The information above allows one to predict satisfactorily that corporate fraud will be reduced based on the requirements for audits of publicly traded companies as prescribed in the Sarbanes-Oxley Act. This is because this act has promoted integrity, professionalism, accountability, transparency and whistle-blowing in public companies. Thus, it would be difficult for a person to commit covert corporate fraud without being discovered and thereafter punished.

Conclusion.

                          The Sarbanes-Oxley Act is a federal law that was enacted by the US congress. This act establishes regulatory standards that must be adhered to by all public accounting and management firms; and company boards. The act requires the management team of a public company to verify the exactitude of their financial information. Also, the act has strengthened and augmented the supervisory powers of the board of directors. The act has 11 sections. One of the main objectives of the Sarbanes & Oxley Act is to minimize corporate fraud and thereby protect investors. This has the effect of promoting investor confidence in the financial market. The act aims to promote, strengthen and protect corporate governance, accountability and transparency. Thus, the accounting profession is better off being government regulated, with regards to the ability of a firm to detect and report corporate fraud.

References.

Keiso, E. (2011). Financial Accounting (6th Edition). Chicago, IL: Wiley.

Koehn, J. (2006). Revisiting the Ripple Effects of the Sarbanes-Oxley Act. The CPA Online

            Journal, 506. Retrieved from

            http://www.nysscpa.org/cpajournal/2006/506/essentials/p32.htm.

Addison-Hewitt Associates (AHA). (n.d). A Guide to the Sarbanes-Oxley Act [Data

            file].Retrieved from http://www.soxlaw.com/index.htm.