Introduction
The SOX (Sarbanes-Oxley) Act was enacted in 2002 by the Congress of U.S. As President Bush signed the Act, he characterized the law as the most far-reaching reformations of business practices in America business practices since the reign of Franklin Delano Roosevelt." The motive of the legislation was to protect investors and the public in general, from fraudulent practices and accounting errors in business. The bill also aimed to better the corporate disclosures' accuracy. The Security and Exchange Commission (SEC) of the U.S. is in charge of the act, publishing rules and setting compliance deadlines on requirements. The Act is a merge of bills drawn by Congressman Michael Oxley and Senator Paul Sarbanes (Lenn, 2012).
The Purpose of the Sarbanes-Oxley Act of 2002
The primary objective of the Sarbanes-Oxley Act was to increase the confidence of investors concerning the financial reports offered by corporations. The legislation was aiming to fix to the audit of U.S. public companies that has an official name of the law, the Public Company Accounting Reform, and Investment Protection Act of 2002. The Act established the Public Companies Accounting Oversight Board (PCAOB) that was to help achieve the primary purpose. The PCAOB was to oversee corporate governance and external auditing issues that had potential effects on the reliability of financial reports. The SOX also increased the responsibilities and work of the corporate managers for the production of sufficient financial reports and restriction of specified activities concerning the external auditors to enhance their independence from audit clients. The main three issues of the legislation are those that relevant for accounting that involve the responsibilities of the Public Companies Accounting Oversight Board (PCAOB), corporations, and external audits (Coates IV, 2007).
The PCAOB answers to the Security and Exchange Commission (SEC) that appoints five full-time Board members. The Board draws standards of auditing used for external audits that are of publicly traded enterprises and looks out for the accounting firms that provide the reviews. The accounting firms reporting to the SEC should register with the PCAOB and report all the information concerning the audit fees, audit clients, and the services offered to the customers. The PCAOB then issues standards for the accounting firms, hence providing guidance on audit independence, ethics, hiring, supervision, and review personnel development. The PCAOB should also inspect the auditing firms to ensure they comply with the SOX auditing standards and regulations. The PCAOB has a responsibility to investigate violations of the SOX regulations, professionals' standards of accounting, and the Board's rules. The Board may give sanctions on the accounting firms, which may include civil penalties and suspension from auditing public companies. The board may pass such matters to the SEC and the Justice Department if there is a need for further legal action (Coates IV, 2007).
The SOX Act affects corporations that are required to report financial information to the SEC. The organizations concerned must have a certificate from the office of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) together with their financial reports. The reports signed by the CFO and CEO must state the following; they have overseen the financial reports, and statements are not misguiding. The reports also present the business's financial condition somewhat together with fair operations' results, and the officers in charge of maintaining and establishing enough systems sufficient for internal controls that ensure reliable reports of finance and for assessing the controls’ effectiveness, and the officer's disclosure to the committee of the company’s audit.
The SOX also mandates that corporations invent audit committees as part of the directors in the board, which must be independent of the management of the firm. The audit committee is in charge of selecting, compensating, and overseeing the external audits of corporations. The audit committee is the primary contact for external audits of an organization.
SOX prohibit external auditors from offering some services to client companies. Some prohibitions include actuarial services, management functions, expert and legal services not relating to the audit, investment deals, and bookkeeping relating to the financial statements or accounting records of the audit client. SOX make sure that the CFO, CEO, and Chief Accounting Officer cannot be employed by the concerned company's external auditor within the one-year duration preceding the audit.
The Effects of Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act has had major effects on auditing practices and financial accounting. The provisions of the Act are a success in increasing the reliability of the financial reporting. SOX has opened new chances for the midsized and small firms and still putting pressure on large companies on who will be retained as audit clients. Hence, some companies that are publicly traded may end up without external auditors thus the need to spend money and time to hold on a new auditor. This may lead to companies rejected as clients to improve the internal governance and control so as to be able to attract services of a professional accountant (Rolf, 2005).
Conclusion
The Sarbanes-Oxley Act can, therefore, be seen as a positive impact on the results and performance of companies related publicly and the public will to invest in such enterprises. Having CEOs and CFOs that participate actively in improving on business governance and also documenting internal controls provides companies with benefits such as an increase in production at lower costs (Rolf, 2005).
References
Coates IV, J. (2007). The Goals and Promise of the Sarbanes–Oxley Act. Journal of Economic Perspectives, 91-116.
Lenn, L. (2012). Sarbanes-Oxley Act 2002 (SOX) - 10 years later. Journal of Legal Issues and Cases in Business, 1-14.
Rolf, C. (2005). EFFICACY OF THE SARBANES-OXLEY ACT IN CURBING CORPORATE FRAUD. RIVIER COLLEGE ONLINE ACADEMIC JOURNAL, 1-16.
