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The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002
What events lead to the Sarbanes-Oxley Act of 2002
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Recommended: The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is the most significant Federal law that impacts public companies to be introduced since the Securities Acts of 1933 and 1934. This legislation set new or enhanced standards for all U.S. public company Board of Directors, top management, and the public accounting firms that audit public companies. The Sarbanes-Oxley Act of 2002 (“SOX”) was introduced in response to a number of accounting scandals around the turn of the millennium, including Enron, Tyco, and WorldCom. Since 2002, SOX has had significant impacts on internal controls, financial reporting, and the accounting profession.
For most public companies, SOX required increased process-level and entity-level controls in order to comply. This has had both direct costs, in terms of direct and indirect compliance costs, as well as benefits, such as enhanced understanding of control design and control operating effectiveness. Moreover, the type or category of internal controls has changed since the introduction of SOX. Prior to SOX, many companies, and their internal audit departments, focused mostly on the internal controls such as segregation of duties, controls over cash and inventory, and cut-off. This type of internal controls focuses on process controls and tends to look at transactions in isolation. Further, these are controls over transactions that are rather common. However, many of the lapses in internal controls that contributed to the aforementioned accounting scandals involved revenue recognition and “less-routine” accounting transactions that were company or industry specific and thus both internal and external auditors were familiar with the internal controls involving these transactions and how to test them. These controls were also more process driven and less like to be performed at the entity-level. Therefore, since SOX, at the bequest of their external auditors in order to comply with the new regulations, companies have focused their internal controls design efforts towards revenue recognition and entity-level controls.
SOX legislation’s purpose was to improve the reliability of financial reporting. It has done so by requiring that every public company have an audit committee that is independent of management, and that the committee have at least one financial expert. The external auditor’s report itself has changed, and now has a paragraph where the external auditor opines on the effectiveness of internal controls over financial reporting. Also, the company’s CEO and CFO must certify financial reports and there are strict penalties if those reports are later found to be fraudulent.
The SOX act section 404 requires that the auditor assess the company’s management of internal controls and report on it. The act requires that a company include a copy of the internal controls in the year end annual report. All financial statements must be certified by a company’s management. (Coustan, 2004)
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
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.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
Consistent accounting and financial frauds in the U.S. alerted the SEC to the imperative need for policy and corporate governance changes. The Sarbanes-Oxley Act in 2002 was enacted to encourage financial disclosures, enhance corporate responsibility, and combat fraudulent behaviour. This Act also helped create the PCAOB, which oversees the auditing practice (Stanwick & Stanwick 2009).
SOX at its core was meant to increase the disclosure requirements of publicly traded firms. In addition, SOX increased the role of independent directors in corporate governance, expanded the liability of officers and directors, required companies to assess and disclose the adequacy ...
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to strengthen corporate governance and restore investor confidence. The act’s most important provision, §404, requires management and independent auditors to evaluate annually a firm’s internal financial-reporting controls. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards.
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents after finding out Enron Company was going to be audited. The exorbitant amounts of money auditors get paid to hide audit discrepancies was also beyond belief. The article went on to explain many companies hire relatives or friends to do their audits, resulting in fraud, money embezzlement, corruption and even the demise of companies. Resulting in the public losing faith in the accounting profession, the Sarbanes-Oxley Act passed in 2002 by congress was designed to restrict what company owners and auditors can and cannot do. From what I gathered in the article, ever since the implementation of the Sarbanes- Oxley Act there has been somewhat of an improvement but questions are still being asked as to why there are still issues that are not being targeted in hopes of preventing more audit failures. The article also talked about four common causes of audit failure: unintentional auditor mistakes, fraud, fatigue and auditor client relationships. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct clearly states an independent auditor because it produces a credible audit, however, when there is conflict of interest, the relation of a former employer, or a relative or even the fear of getting fire...
The Sarbanes-Oxley Act was enacted on July 30, 2002. It was enacted by the 107th United States Congress. It is named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley. It is also known as the ‘Public Company Accounting Reform and Investor Protection Act’ in the Senate and ‘Corporate and Auditing Accountability and Responsibility Act’ in the House. The main purpose of this act was to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. This act was enacted as a result to a number of corporate and accounting scandals including those affecting Enron, Tyco internationals, Adelphia, Peregrine Systems, and WorldCom. The Securities Exchange Commission (SEC) adopted many rules in order to implement the Sarbanes-Oxley Act.
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.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Section 303 prohibits an officer or director of an issuer to fraudulently influence, coerce, manipulate, or mislead the auditor. Section 304 requires executives of an issuer to forfeit any bonus or inventive based pay or profits from the sale of stock, received in the 12 months period after the date of issuance of financial statements subject to an earnings restatement (Claw-back Policy). Section 305 allows the SEC bar any person who has violated federal securities laws from serving as an officer or director of an issuer. Section 306 prohibits trading by officers and directors during blackout periods established between the end of a quarter and the earnings report date. Title III focuses on reducing fraud, mostly related to CEOs and CFOs of public companies. Before SOX and this requirement, CEOs and CFOs simply deny in any knowledge of knowing financial wrongdoing. Now, they require to take more responsibilities on what the company is reporting on financial statements. They have to sign off on financial statements that the financial statements are presented fairly to their best of knowledge and internal control of the company is efficient and
The report on internal controls, according to ExxonMobil’s CEO, Treasurer and Controller, states they are solely “responsible for establishing and maintaining adequate internal control over (ExxonMobil’s) financial reporting.” They evaluated the effectiveness of internal controls over financial reporting based on COSO’s framework and concluded that controls were effective (MD&A, F-22). The report in internal controls acknowledged us—ExxonMobil’s independent public accounting firm PricewaterhouseCoopers LLP (PwC)—stating that the Corporation maintained effective internal control over financial reporting for 2009 and 2010 as it is the responsibility of management to maintain and assess its effectiveness. We, PwC, are responsible only to express an opinion on internal controls, which we opined in 2009 as unqualified (MD&A, F-22).
The rise of Enron took ten years, and the fall only took twenty days. Enron’s fall cost its investors $35,948,344,993.501, and forced the government to intervene by passing the Sarbanes-Oxley Act (SOX) 2 in 2002. SOX was put in place as a safeguard against fraud by making executives personally responsible for any fraudulent activity, as well as making audits and financial checks more frequent and rigorous. As a result, SOX allows investors to feel more at ease, knowing that it is highly unlikely something like the Enron scandal will occur again. SOX is a protective act that is greatly beneficial to corporate America and to its investors.