Instructor: Bradley Johnson
BUS 592: Financial Accounting & Analysis
May 20, 2013
Abstract summary: The Sarbanes Oxley Act of 2002 which was enacted into law based on the recent scandals of a major companies who reported falsified accounting, understating expenses, overstating assets or understating liabilities, use of fictitious and fraudulent transactions and direct falsification of financial statements to give a misleading impression of the business financial status to the SEC (Security Exchange Commission). The impact that the Sarbanes Oxley Act of 2002 rules have on the function of company executives, auditors and the reporting of financial statement by the publicly traded companies.
After the major financial scandals of WorldCom, Tyco and Enron, legislation was implemented to build the confidence of investors by having businesses comply with accounting regulations and giving whistleblowers protection under the law. The architects of the law, Senator Paul Sarbanes and Representative Michael Oxley wrote the law to have businesses proves accuracy and reliability of their financial statements. SOX set up the framework for the establishment of the Public Company Accounting Oversight Board and impose requirements on publicly held companies that were designed to restore investor and public confidence in corporate financial management. (O’Toole, 2011, p. 11-22) Several key components of SOX and the effect it has had on public traded companies. According to White (2012), the birth of SOX was implemented by the United States government to protect the American public from high visible business scandals at the beginning of the millennium. There was a need for the protection of investors based on the actions of business tycoons who used their businesses for self-gain and control. The main aspect of the act was to provide integrity to financial condition of publicly traded U.S. companies and fostering corporate accountability in the U.S. marketplace. The Security Exchange Commission would certify the financial reports.
The provisions under the law (SOX) a public company’s chief executive officer and chief financial officer must certify for each annual or quarterly report filed under the Securities Exchange Act that: * The signing officers have reviewed the report * The officers knew the document was true * The officers knew the document the information reported was fairly presented the financial condition of the company. * The executive officers have evaluated the effectiveness of the internal controls within 90 days.
These are just few of the compliances that businesses are to certify under the law. Before SOX this was not a requirement for financial reports. The procedures of the law allow basis for establishing a complaint.
The certification of financial reports was a requirement of organizations to have internal controls within the finance area of the corporation. “Ernst & Young and Deloitte & Touche said that reporting under Section 404 provides investors with meaningful information about a company's internal control over financial reporting.” (Audit Firms Urge SEC Not to Extend 404(b) Exemption Beyond Dodd-Frank Relief... 2011).
The Sarbanes Oxley Act of 2002 was a consequential requirement upon a corporation goes above and beyond that which is already in place to provide results in a moderate to major increase in cost. These costs would be passed onto the consumer or produce less profits for the business.
The bill created a reduction in jobs to meet the new guidelines under SOX. Businesses had to use an outside auditor to monitor and audit their internal process. “According to Hills, another beneficial effect of Sarbanes-Oxley is that audit committees have taken charge of the outside audit process.” (Former SEC Chair and Deloitte Deputy CEO See Increase In Value of