The Sarbanes-Oxley Act of 2002 (SOX) was named after Senator Paul Sarbanes and Michael Oxley. The Act has 11 titles and there are about six areas that are considered very important. (Sox, 2006) The Sarbanes-Oxley Act of 2002 made publicly traded United States companies create internal controls. The SOX act is mandatory, all companies must comply. These controls maybe costly, but they have indentified areas within companies that need to be protected. It also showed some companies areas that had unnecessary repeated practices. It has given investors a sense of confidence in companies that have complied with the SOX act.
Capitalism is almost too good to be true, but there comes a time when government intervention becomes a necessity, especially after a series of scandals in corporate businesses that destroyed the trust of investors and consumers. The government finally had to come up with a solution due to the fact that the free market is no longer efficient on its own. Established in 2002, the Sarbanes-Oxley Act, also known as Public Accounting Reform and Investor Protection Act, is a federal law that aims to improve corporate governance by increasing compliance regulations and financial transparency in hopes of preventing big scale corruptions such as the Enron Scandal from happening again. The Enron Scandal, along with other corruption and fraud in the businesses
In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency.
In conclusion, internal controls include separation of duties, assignment of responsibilities, third-party verification and the use of mechanical and physical controls. In and of themselves, these tactics stop and prevent much abuse of the bookkeeping and accounting systems. The addition of Sarbanes-Oxley requirements in 2002 require that a company enact internal controls and assign responsibility of the control system to executives and directors, further providing insurance that financial reporting is accurate. Without this insurance that reports are accurate, company stock will fall and investors will be lost. Even with intrinsic limitations, the positive aspects of good internal controls far outweigh the negative implications. Good internal controls equal accurate financial records and future company success.
After major corporate and accounting scandals like those that affected Tyco, Worldcom and Enron the Federal government passed a law known as the Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act. This law was passed in hopes of thwarting illegal and misleading acts by financial reporters and putting a stop to the decline of public trust in accounting and reporting practices. Two important topics covered in Sarbanes-Oxley are auditor independence and the reporting and assessment of internal controls under section 404.
Public Law 107-204 of the 107thCongress was enacted by the senate and House of Representatives to “To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” This law is better known as the Sarbanes Oxley Act, consists of a number of sections designed to oversee and prevent securities fraud, and enhancements to white-collar crime. Thesix key principles of the SOX internal controlsaccording to Internal Control and Cash are: establishment of responsibility, segregation of duties, documentation procedures, independent verification, physical controls, and other controls. Sarbanes Oxley has changed internal controls through risk mitigation and accountability. A key factor, the establishment of responsibility includes authorization and approval of transactions by a ...
What makes the Sarbanes-Oxley Act effective is that it is “Administered by the U.S. Securities and Exchange Commission (SEC), SOX sets deadlines for compliance and publishes rules on requirements, covering a wide range of rules. The consequences for failing to comply with certain provisions range from fines to imprisonment” (Cunningham). The SOX also creates, “accountability of company executives and members of the board of directors” (Jahmani). The act essentially created several provisions to regulate and protect shareholders along with the general public from accounting errors and fraudulent practices in the enterprise. The accounting industry, financial reporting, and the auditing of public companies in particular must follow these provisions.
Dodd-Frank and Sarbanes-Oxley Acts are important legislations in the corporate world because of their link to public and privately held companies. Sarbanes-Oxley Act was enacted to enhance transparency and accountability in publicly traded companies. On the contrary, Dodd-Frank Act was enacted to disentangle the confused web of financial service company valuations. Actually, these valuations are usually hidden by complex and unclear financial instruments. The introduction of Sarbanes-Oxley Act was fueled by recent incidents of accounting frauds by top executives of major corporations such as Enron. In contrast, Dodd-Frank Act was enacted as a response to the tendency by banks, insurance companies, hedge funds, rating agencies, and accounting companies to serve up harmful offer of ruined assets and liabilities brought by systemic non-disclosure (Anand, 2011, p.1). While these regulations have some similarities and differences, they have a strong relationship with the financial markets.
Sarbanes-Oxley Act, which contains 11 sections, was originally created by Senator Paul Sarbanes and Representative Michael Oxley in response to the several exposed accounting scandals, including WorldCom and Enron as the most prominent examples. As a result of these accounting scandals being exposed one after another, the confidence that investors had put in the capital markets collapsed overnight along with those companies that engaged in huge frauds. Sarbanes-Oxley Act of 2002 had been passed to redeem the reputation of the markets. With its stated purpose, which is “to protect investors by improving the accuracy and reliability of corporate disclosures,” SOX Act came into effect in 2004. However, the deadlines of compliance have been extended several times due to the significant costs incurred by companies’ compliance of the SOX Act. In addition to the dollar amount required to spend, another real cost that cannot be ignored. As stated by Peter Bible, the CAO of General Motors Corp, “having ...
The Sarbanes-Oxley Act of 2002, also known as the SOX Act, is created in response to the series of deceptive and outright fraudulent activities of the big business in the 1990s. Sarbanes-Oxley, or SOX, is a federal law that is a complete reform of business practices. The Act points specifically at public accounting firms that take part in audits of corporations and it is passed in response to a number of corporate accounting scandals such as Enron, WorldCom, Global Crossing, Tyco and Arthur Andersen. It sets new standards for the corporate management, corporate boards of directors, and public accounting firms. Almost all the scandals involved accusations of presumed “creative accounting,” or complicated
In this paper, we will discuss the role of internal control in curbing corruption to emphasise the importance of a strong and effective internal control to curb the corruption or unlawful behaviour. Internal control is a process that designed to provide assurance to achieve efficiency and effectiveness of operations, reliability in reporting of financial statement and ensure compliance with applicable laws and regulations (ISSAI, 2013).
The internal control environment system is recognize as the main cause of the business.The presence of smooth internal control environment is necessary for well achieving the business objectives.According to O’Leary et al (2006) an adequate system of internal control is considered as critical to good corporate governance.
In order to deter fraudulent activities by both management and employee, many companies employ an internal control system. A system of internal controls is a group of processes and procedures in writing, that are put into place by the organization to achieve operational efficiency, effectiveness, reliable financial reporting and to encourage incorruptibility. One of the major leading authorities on the issue is an organization out of the United States called the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is a joint initiative of five private sector organizations, who provide thought leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence,
Overall, the company is having ineffective controls regarding different departments and in the whole organization. An effective internal audit department should be established within the organization which should test the effectiveness of these controls on regular basis and make it sure that all controls are working effectively and efficiently with the different departments of the organization. Also the Internal auditor should implement the most effective processes and measures to prevent and detect the fraud, corruption and non compliance with the laws and regulations in the organization. Establishment of internal audit committee would be helpful in this regard which comprises of executive and non executive directors.
If there are no proper internal controls then stakeholders linked to the firm are likely to undermine good governance because there are no structures to prevent them or to punish those who are liable for misconduct. According to Solomon (2007), internal control in corporate governance entails having appraisal system that evaluates performance, a risk identification and estimation system, a management oversight, control measures, and isolation of duties (p. 161). Yet, while internal control promotes acceptable practices, the onus is still with the individual entrusted to follow the practices. The stewardship theory supports this notion by arguing that managers have a moral and ethical obligation to act in a transparent and responsible manner as stewards of resources they manage (Fernando 2009, p. 49). This reflects back on the character of individuals elected to the BOD. It might seem subtle but members of the BOD control major decisions and may be susceptible to misuse it. For instance, when the higher ownership of an individual eclipses a certain threshold, this may cause the issue of tunneling and inefficiency. It also reflects back on the shareholders who elect them, thus, divulging the overall perspective, attitude and approach of all the internal