Sarbanes-Oxley Act
Sarbanes-Oxley Act
BUS 591
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Sarbanes-Oxley Act
Sarbanes-Oxley Act of 2002 was in acted because of scandals on Wall Street it’s a controversial
law design to reverse the declining public trust in accounting and reporting by major public
entities. This law is broad in attempts to establish new standards for public trading companies
(Sarbanes-Oxley 2002). Management and accounting firms that oversee practices this includes
establishments of Public Company Account Oversight Board. The PCAOB job is to audit the
auditors this act also requires a certification of financial reports by a fiduciary position within the
company.
This means that there is a stamp of approval by those in charge of the company in other words
the big wigs are held responsible. Moreover, this act enhances criminal and civil penalties for
violations of securities laws. People that are convicted of wrong doing will face a much harsher
punishment by the government. The expenses related to the development of the SOX have been
quite high because of the huge burden faced by public companies (Sarbanes-Oxley).
The question has been asked how necessary is this law? The amount of money that a company
has generated has fallen because of the work it took to familiarize the company with the SOX. A
decrease in listed public companies has increased recently. Since the United States have so many
regulations many companies have move to a foreign exchange. This is a way for those
companies to have fewer laws to follow and it is more cost effective.
The consumer is the one who pays for the cost of the SOX. This bill was influenced by the
activities of companies like Enron, Tyco International and WorldCom. Scandals like Enron and
company have cost billions to the trusting investors. For example Enron was in fact an American
energy commodity services company from Houston, Texas. Before Enron went bankrupt on
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Sarbanes-Oxley Act
December 2 , 2001 Enron had 20,000 employees Enron was one of the world’s leading electric ,
natural gas , communications pulp , and paper companies (Sarbanes-Oxley).
In 2001 it was discovered that Enron financial condition was all fabrication. The accounting
scandal was very carefully planned out and made world news. Enron has become a part of
scandalize history so now Enron is very widely known. Enron is the symbol of corporate fraud
and corruption that is when the government took a closer look at the operation of organizations.
SOX were born to prevent companies and organizations from defrauding the public investors and
this act is design to keep them honest.
Enron, Tyco International and WorldCom have paved the way for the government to scrutinize
companies and organizations. The SOX is a great example of the development of regulations
brought on because of companies and organizations being greedy. This dishonesty has caused
lots of investors to lose billions and that is just unacceptable for the investor and the economy.
With more regulations come more headaches for companies because how will they know how to
comply with the SOX without guidance (Sarbanes-Oxley).
The Sarbanes –Oxley Act or SOX was developing in 02. This act was developing to discourage
unethical business practices. This act has been influenced by companies like Enron this has been
achieved by enhancing the reporting of finances (Coates). Sarbanes-Oxley expects corporations
to posse higher standards with a greater accuracy while giving financial report data (Cohen).
Aspects of the outcome can be deemed negative or positive I will explore key components
economic consequences and criticisms as a result of SOX.
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Sarbanes-Oxley Act
The most significant segments of SOX are section 404 and 302 management assesses the
internal control which is parallel to section 404 and maintain responsibility. Corporate
responsibility defines upholding financial reports with upper management being responsibility
for the content of reports as will section 302 (Verleum). Before the SOX were introduced
financial data was manipulated more easily. Moreover, companies would in the past take more
risks according to the SOX it is next to impossible to deceive investors in today’s world. Since
the SOX have developed companies have thought twice about risk taking this is one advantage
for the company.
For example upper management CEO, CFO etc.… will be less likely to take any kind of risk if
they risk losing their job as well. Future accounting deception is prevented with policies that are
strict one of the benefits of this strict policy is the restored trust for investors. Inventors can be
secure in their decision to invest in a future business because of the SOX reliable financial
reports. Additionally, the economy should benefit thanks to the SOX the SOX built a foundation
on ethics and trust so in hind sight the SOX will stimulate the economy.
For example, investors may be hesitant to have faith in financial reports this would be bad news
for the economy. Ten years have pass since the development of the SOX organizations are still
trying to make improvements to their financial reports. For example, some hotels are giving
detailed write off reports General Electric gives a more detailed revenue report and more detailed
reports on operating profits; IBM is even trying to provide more detailed reports (Kimmel,
Weygandt and Kieso).
Unfortunately, elapse of time and scope of benefits of these well-known companies is the only
aspect of modern gain. From the current year that SOX was developing large house hold name
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Sarbanes-Oxley Act
companies have not mastered the SOX. This transition for many companies has shown just how
hard it is to function without the direction of SOX. There are lots of critics concerning the SOX
with lack of guidance that has cost many companies countless dollars.
For example lack of guidance can affect the way a company measures the quality of their
accounting. There has been questions about the quality of the accounting firms practices would
it be better for an accounting firms to focus more on reliability or accuracy of reports ; or is it
better for a firm to focus on how well the report reflect the economic position or performance ?
In the end the lack of proper direction from SOX for companies creates a loss of time as well as
loss of money (Verleum).
For companies to ensure compliance of the SOX they will need to concentrate on funding and
time. Additionally, companies fear penalties and long audits that atomically preserve ethics this
directly affect companies. For instance, without proper guidance from the SOX companies will
go out of their way to ensure compliance this waste money and time. SOX discourage other
outside firms for example the SOX is an impediment for firms abroad.
Overseas firms have been stall by the SOX from entering the United States markets (Miller and
Bowen). After weighing the good and bad of the SOX I have concluded most criticisms are in
the form of questions. Questions that have been ask are is there to much regulation , is the
money spent for SOX worth everything that goes into keeping it alive , and are the goals that the
SOX is trying to achieve being reached ? Do the SOX prevent manipulation and stop blind risk
to investors?
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Sarbanes-Oxley Act
Because of lack of guidance the SOX confuses many companies so companies don’t know
whether the SOX is there to prevent future unethical business practices. A prime example of this
is the World Com’s scandal; the World Com scandal their financial report entries were
manipulated to meet the net income targets billions were lost (Kimmel). There is a chance that
the SOX could have prevented the WorldCom scandal but the SOX are not able to prevent all of
the unethical practices in the future.
After the implementation of the SOX “companies are still using earnings management strategies
to mislead investor’s (Cohen)”. It would have been just impossible for the SOX to prevent the
World Com scandal. The financial reporting is enhanced for companies with the help of the SOX
this increases the company’s internal control. The benefits of the SOX are achieving more
reasonable goals and higher standards with better accuracy on financial data which increase
internal control.
Even with all of the regulations being followed the SOX will still require an even better direction
with precision. The two key components in the SOX that allow adequate internal control are.
The Public Company Accounting Oversight Board or (PCAOB) it was established to enforce
auditing standards and regulations. The upholding of corporate executives and board of directors
to much higher standards than in the past this ensures companies honesty.
If there were no oversight or forcible penalties dishonesty would spread throughout.
Organizations have no choice but to follow the rules because of the penalties and long audits.
Imprisonment and fines can proceed any short falls of the company like reliability and control
(Kimmel Weygant, and Keiso). Because of lack of direct the key component which is to
enhance the financial reporting possesses a problem.
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Sarbanes-Oxley Act
Without proper guidance the strict policies and penalties of which help companies have better
internal control becomes a burden. As a result of the strict SOX policies companies are
overloaded and economic consequences are threatened. Over the last ten years it has become
very hard to evaluate the strain the SOX has imposed on companies as a result of excessive cost
to meet SOX compliance.
It has been know that the excessive strain on companies from the SOX could put a damper on
future success for many companies. Economic consequences would be a direct result of the SOX
demanding too much from the company’s personal sustainment. Further regulations would be a
main concern and government influence that over exhaust company progression. This could
mean that no company would survive over the long term because of the SOX regulation
demands.
Presently, shareholders interest, ethics, and intervening in business to ensure trust in the
economic governance relationship is great (Yakhou). So far I mention the key components
criticisms and the economic consequences of the development of the SOX. Positive and
negative aspects have been reached due to the implementation of the SOX ;with attention drawn
to the lack of proper guidance the SOX has shown that the SOX risk economic consequences .
In conclusion, if the SOX were more specific with the guidelines they proposed and offer more
solutions than regulations companies would not become handicap. For example, the SOX should
decide whether a firms accounting quality is good by basing the accounting on reliability and
accuracy or may be a company’s economic position and performance.
7
Sarbanes-Oxley Act
Sarbanes-Oxley Act of 2002 was in acted because of scandals on Wall Street it’s a controversial
law design to reverse the declining public trust in accounting and reporting by major public
entities. This law is broad in attempts to establish new standards for public trading companies
(Sarbanes-Oxley 2002). Management and accounting firms that oversee practices this includes
establishments of Public Company Account Oversight Board. The PCAOB job is to audit the
auditors this act also requires a certification of financial reports by a fiduciary position within the
company.
The question has been asked how necessary is this law? The amount of money that a company
has generated has fallen because of the work it took to familiarize the company with the SOX. A
decrease in listed public companies has increased recently. Since the United States have so many
regulations many companies have move to a foreign exchange. This is a way for those
companies to have fewer laws to follow and it is more cost effective.
The consumer is the one who pays for the cost of the SOX. This bill was influenced by the
activities of companies like Enron, Tyco International and WorldCom. Scandals like Enron and
company have cost billions to the trusting investors. For example Enron was in fact an American
energy commodity services company from Houston, Texas. Before Enron went bankrupt on
December 2 , 2001 Enron had 20,000 employees Enron was one of the world’s leading electric ,
natural gas , communications pulp , and paper companies (Sarbanes-Oxley).
Enron, Tyco International and WorldCom have paved the way for the government to scrutinize
companies and organizations. The SOX is a great example of the development of regulations
brought on because of companies and organizations being greedy. This dishonesty has caused
lots of investors to lose billions and that is just unacceptable for the investor and the economy.
8
Sarbanes-Oxley Act
With more regulations come more headaches for companies because how will they know how to
comply with the SOX without guidance (Sarbanes-Oxley).
The most significant segments of SOX are section 404 and 302 management assesses the internal
control which is parallel to section 404 and maintain responsibility. Corporate responsibility is
defines at upholding financial reports with upper management being responsibility for the
content of reports as will section 302 (Verleum). Before the SOX were introduced financial data
was manipulated more easily. Moreover, companies would in the past take more risks according
to the SOX it is next to impossible to deceive investors in today’s world. Since the SOX have
developed companies have thought twice about risk taking this is one advantage for the
company.
Unfortunately, elapse of time and scope of benefits of these well-known companies is the only
aspect of modern gain. From the current year that SOX was developing large house hold name
companies have not mastered the SOX. This transition for many companies has shown just how
hard it is to function without the direction of SOX. There are lots of critics concerning the SOX
with lack of guidance that has cost many companies countless dollars.
In conclusion, if the SOX were more specific with the guidelines they proposed and offer more
solutions than regulations companies would not become handicap. For example, the SOX should
decide whether a firms accounting quality is good by basing the accounting on reliability and
accuracy or may be a company’s economic position and performance.
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Sarbanes-Oxley Act
References:
Coates, C.C. (2007) Journal of Economic Perspectives. The goals and promises of SarbanesOxley Act.
Cohen, D.D (2008) Sarbanes-Oxley Periods Retrieved: November 10, 2012 from: ABI/Inform
complete.
Kimmel, D.P., Weygandt, J.J. and Keiso, E. D. (2009) Financial Accounting tools for business
decision making Hoboken: John Wiley and Sons Inc.
Miller, J. A., and Bowen, B. W. (2011) Sarbanes –Oxley Act small and large firm regulatory
cost.
Sarbanes-Oxley Act of 2001 www.accounting today.com/channels/Sarbanes-Oxley.
Vereun, M.G. (2011) the accounting quality of Sarbanes-Oxley retrieved: November 10, 2012
from: ABI/inform complete.
Yakhou, M. D. (2005) Corporate Governance; corporate governance reform retrieved: November
10, 2012 from: ABI/inform complete.
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