Analysis of Sarbanes-Oxley – Section 404
And
Affect on Small Companies
Content
I. Executive Summary 1
II. Background Facts 2
III. Issue Stated 3
IV. Analysis 4-5
V. Conclusion 6
VI. References 7
Executive Summary
404 of Sarbanes Oxley: It’s affect on small business.
The implementation of section 404 of Sarbanes-Oxley's has presented challenges for many U.S businesses. The implementation rules and guidelines have imposed significant cost and time restraints. Small companies are disproportionately getting hit harder then the larger companies. Financially the smaller companies have disadvantage and can not take on the same rules and guidelines as large companies. The cost involved in implantation and compliance will cost small companies on average
Banks, insurance companies and mutual funds generally do not invest in the companies comprising the bottom 6 percent of market capitalization.
Small companies are not stewards of our national wealth in the same way as large companies. The risk to the economy from the collapse of a small public company is limited not only by its size, but also because the effects of such a collapse would not ripple very far out into the economy. Even a major Enron-style debacle at a small company -- indeed, even the failure of a fair percentage of such companies -- would hardly affect the wealth of the nation at all.
The cost of complying with SOX 404 impacts smaller companies disproportionately, as there is a significant fixed...
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SOX spending is down, but CIOs still have work to do
By Linda Tucci, Senior News Writer
16 Aug 2007 | SearchCIO.com
http://searchcio.techtarget.com/news/article/0,289142,sid182_gci1268327,00.html?asrc=SS_CLA_308970&psrc=CLT_182
What’s Next In SOX 404 For Smaller Public Companies?
Page 36 The Metropolitan Corporate Counsel October 2006
Help Websites
http://www.amper.com/publications/sec-section-404-compliance.asp
http://iblsjournal.typepad.com/illinois_business_law_soc/2005/10/will_time_help_.html
http://www.amper.com/publications/sarbanes-oxley-small-businesses.asp
http://www.law.com/jsp/ihc/PubArticleFriendlyIHC.jsp?id=1146733529444
http://www.foxnews.com/story/0,2933,196044,00.html
http://www.pro2net.com/x42491.xml
http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf
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.
Sarbanes-Oxley Act and Dodd-Frank Act are some of the most important regulations in the modern financial environment. The significance of these regulations is attributed to their focus on promoting the vitality of financial markets through addressing complexities in financial procedures and preventing financial wrongdoing. The enactment of these regulations was fueled by some financial irregularities in the corporate world and some major players in the financial markets. Despite the strong link between these laws and the financial markets, they have some similarities and differences in light of their respective objectives.
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.
Zhang, I. X. (September 01, 2007). Economic consequences of the Sarbanes-Oxley Act of 2002. Journal of Accounting and Economics, 44, 74-115.
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.
Another substantial problem with Sarbanes-Oxley and Dodd-Frank reform efforts are the misplaced ethical incentives it places on attorneys in advice on the structure of their clients. Since Sarbanes-Oxley only applies to companies traded on public markets, it substantially raises the cost of being public, and creates strong incentives to go-private for management and directors as well as a company’s legal advisors. Lawyers stand to gain substantially not only from the reduced pressures of reporting and monitoring obligations, but additionally from the substantial fees garnered in advising large-scale, multibillion dollar buy-outs. Th...
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.
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.
The Sarbanes-Oxley Act at 10: Enhancing the reliability of financial reporting and audit quality (2012). Ernst & Young. Retrieved November 9, 2013 http://www.ey.com/publication/vwluassetsdld/soxat10_jj0003_july2012/$file/soxat10_jj0003_july2012.pdf?OpenElement
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.
Holt, Michael F. The Sarbanes-Oxley Act: overview and implementation procedures. Oxford: CIMA Publishing, 2006. Print.
The Act of Sarbanes Oxley of 2002 was enacted in July 30, 2002. This reform is designed to cover all public company boards, management and public accounting firm.
The Sarbanes-Oxley Act of 2002 was passed by Congress to protect investors from fraudulent accounting records. The passing of the act forced strict regulations upon publicly traded companies to improve the accountability of accounting records for investors as a result of the extreme levels of malpractice that occurred in the late twentieth and early twenty-first centuries. The implementation of the SOX Act changed the way accounting records were checked for injustices. With the act, upper level managers were required to certify financial statements for accuracy (section 302), it required management and auditors to establish internal controls along with reports on the efficiency of the costly controls (section 404), and added required outlines for electronic record keeping (section 802).
Sarbanes-Oxley Act was enacted following a prolonged period of corporate scandals involving large public companies from 2000 to 2002, this was to restore investors confidence in markets and close loopholes for public companies to defraud investors. This act has had a profound effect on cooperate governance in the US, it requires public companies to strengthen audit committees, perform internal controls tests, set personal liability of directors and officers for accuracy of financial statements, and strengthen disclosure. The Sarbanes-Oxley
Sarbanes-Oxley act was passed in 2002 in reaction to several scandals and the dot com bubble involving major corporations. Eron, Tyco and Worldcom were the prime scandals. In the light of those scandals, Sarbanes- Oxley was passed with an intention to make corporate governance more rigorous, protect investors from fraudulent activities performed by the corporation by making financial practises more transparent, strengthen corporate oversight and promote/improve internal corporate control. In short it was meant to enhance corporate governance and restore faith in investors.