Effects of the Sarbanes Oxley Act
The Sarbanes Oxley (SOX) Act of 2002 contains additional regulations and oversight for corporations, auditors, and the accounting profession. The SOX Act attempts to decrease fraudulent financial reporting by increasing accountability and by the implementation of severe civil and criminal penalties (Clark, 2012). The increased oversight and regulatory procedures affects regulators, taxpayers, and organizations in terms of time and compliance costs (Clark, 2012). The SOX Act consists of 11 titles that address various issues on financial reporting (SOX, 2002).The 11 titles contain 66 sections in total that address various sections in the financial reporting cycle (Schaeffer, 2006).
The Corporate Responsibility Title stipulates that the senior executives of a corporation wield the responsibility for the correctness of financial reports. The SOX Act has detailed documentation on the interaction between the external auditor and audit committees as well as the behavior of corporate officials and the punitive measures for failure to comply with the stipulated rules (Clark, 2012). The accuracy in financial reporting as required by the Corporate Responsibility Title increases confidence in companies (Kranacher, 2011). Miller & PashKoff (2002) argue that the Corporate Responsibility Title emphasizes on the rotation of auditor audits with different registered auditors. This rotation ensures objectivity and independence (SOX, 2002). Audit Committee effectiveness increased after the execution of the SOX Act, according to a research conducted in 2009 (Gramling et al., 2009).
Clark (2012) views the enormous expense to comply with the SOX Act, as the only setback. A study done by Jain & Rezaee (2006) shows that the cost of compliance can range from $1 million to $10 million, although the expensive cost of compliance is countered by an increase the wealth of the firms that comply.
The positive effects of the SOX Act outweigh the negative effects. The act encourages accountability and financial reporting accuracy. The penalties laid out for the failure to comply with the act, deter fraudulent and unethical behavior in the corporate world. This act ensures the proper running of corporations and revives investor confidence.
Clark, K.N. (2012).The Effects of Sarbanes Oxley on Current Financial Reporting Standards. Liberty University. Retrieved from :< http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1303&context=honors>
Gramling, A., Hermanson, D., & Hermanson, H. (2009).Audit committee material
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Kranacher, M. (2011).Full disclosure: All investors need to know. In Clark, K.N. (2012).The Effects of Sarbanes Oxley on Current Financial Reporting Standards. Liberty University.
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