Answer to a.
In the year 2002, Congress passed the Sarbanes-Oxley Act, also known as SOX. The purpose of the Act is to emphasize regulatory standards to be maintained by public accounting firms, and the management and board of public companies. The top management and board of corporations are accountable for their company’s financial dealings and records. They are obliged to pledge the validity and accuracy of the financial data maintained by them. Further, the Act specifies severe penalties for organizations indulging in fraudulent financial practices. Finally, the ACT empowers third party auditors who evaluate the accuracy and authenticity of financial statement of companies. It also provides the board of directors with greater oversight into financial activities of the company.
Answer to b.
The Act created the Public Company Accounting Oversight Board or PCAOB, a non-profit organization that has SEC oversight and administration. Every auditor of public corporations is required to register and share specific details of clients companies and associated people with the PCAOB. The NGO also monitors every CPA firm for compliance. The PCAOB is required to maintain the highest quality standards and review in accordance to best practices observed by professional firms such as AICPA. The Act limits the consulting services provided by auditors for client, so that there is no conflict of interest. For the same purpose, the Act prohibits the employment of ex-employees of audit firms in client corporations. According to the SOX Act, audit committees of corporations must consist of solely non-executive directors, with the audit firm reporting directly to them. The audit firm and partners are obliged to be rotated every 5 years. It is forbidden for executives of the company to be granted personal loans from the company. Chief executive and financial officers –CEOs and CFOs - of the client company are obliged to certify its financial statements. The Act also provides protection to those who expose fraudulent practices by auditors or public companies. Finally, it sets strict punishments for fraudulent corporate activities and practices such as shredding of vital data .
Answer to c.
There have been three major amendments to the SOX Act, which are:
- Housing and Economic Recovery Act of 2008 whereby the director of Federal Housing Finance Agency or FHFA may be provided with confidential information at the SECs discretion
- Dodd-Frank Act 2010 whereby a string of inclusions and exemptions were made pertaining to non-accelerated filers, foreign companies, monetary rewards to those who exposed frauds, greater authority being granted to the PCAOB to include monitoring of dealers and brokers falling under the Exchange Act of 1934, the use of civil money penalties for the benefit of victims, a change in the definition of ‘person associated with an audit firm’, and permitting the PCAOB to share confidential information with foreign audit authorities under certain conditions and the discretion of the PCAOB
- JOBS Act of 2012 whereby companies falling under the category of Emerging Growth Companies were exempted from complying with SOX, any new accounting standard until and unless specified for private companies, rotating their auditors, and compliance with new audit standards until and unless required explicitly by the SEC
Answer to d.
In the year 2007, Nicholas Tides and Matthew Neumann, then employees of the Sarbanes-Oxley audit department at Boeing, were turned away by the management when they raised concerns about suspicious auditing activities. Tides and Newmann then leaked the information to a news reporter who exposed it in the Seattle Post Intelligencer. As a backlash, both Tides and Neumann were terminated and filed a suit claiming that their termination was illegal under the Whistleblower protection of the SOX Act. The Supreme Court, however, ruled that employees sacked as a result of leaking information to the media did not fall under the protection. This interpretation meant to highlight that those who sought to expose fraudulent practices would have to go through the right channels or they may not be protected after all
Answer to e.
The SOX Act, in totality, is a major step in ensuring scandals such as Enron and WorldCom are minimized, if not entirely eliminated. It is vital in ensuring the protection of public interest from fraudulent practices followed by public corporations. Although the Act has laid financial pressure in the form of compliance costs, it is negligible when compared to the resultant investor benefit. It is also crucial in maintaining the continued belief of the people in investing in stocks of publicly traded companies, which is vital for the economic wellbeing of the nation.
Answer to f.
Fraudulent financial activities can spell disaster for public and private companies alike. The best practices prescribed and followed by the PCAOB can be applied even to large and mid-sized private firms, especially partnerships. While public money is invested in public companies, private firms too have a substantial amount of funds in the form of transactions that can be exploited for fraudulent practices. Suppliers and consumers of such firms could suffer as a result of such frauds and hence following the mandates of the SOX Act could prove to be beneficial to private firms as well.
Works Cited
Deloitte. (2002, July 30). Sarbanes-Oxley Act 2002. Retrieved March 18, 2013, from IASPlus: http://www.iasplus.com/en/binary/resource/sarbanesoxley.pdf
Ernst & Young. (2012). The Sarbanes-Oxley Act at 10 - Enhancing the reliability of financial reporting and audit quality. Retrieved March 18, 2013, from Ernst & Young: http://www.ey.com/Publication/vwLUAssets/The_Sarbanes-Oxley_Act_at_10_-_Enhancing_the_reliability_of_financial_reporting_and_audit_quality/$FILE/JJ0003.pdf
Katz, Marshall & Banks LLP. (2011, November 1). Supreme Cuort Lets SOX Media Leaks Ruling Stand. Retrieved March 18, 2013, from Sarbanes Oxley Whistleblower: http://www.sarbanes-oxley-whistleblower.com/blog/2011/11/01/supreme-court-won%E2%80%99t-hear-case-finding-media-contacts-not-protected-by-sox/
