Analyze at least three underlying causes for the creation of the Sarbanes-Oxley Act. Next, rank the causes that you have analyzed from the most important to the least important to the creation of the Act. Explain your rationale.
In the later part of 1990s, there was an epidemic of accounting scandals which arose with the disclosure of financials transgressions by trusted corporate executives. The misdeeds involved misusing or misdirecting funds, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, and overstating of revenues.
Some of the companies involved in the creating accounting practice in the late 1990s and early …show more content…
Secondly, conflict of interest was major issue during the late 1990s. For example, Arthur Anderson was also performing IT services for Enron and the same they were their auditors helping to misstate their financial statements. SOX Section 201 make sure that auditors are providing independence attestations to their audit services and not writing an audit report based on some contract from the client. Accounting firms were setting up clients internal controls, performed some the internal control audits, and then audited the process and result and certified them as satisfactory and accurate. Auditors are supposed to be professionally skeptical and neutral parties who confirm that a company is accurately representing itself.
Lastly, during the scandals, a lot of CEOs were putting fingers at other personnel within the company instead of taking responsibility for the company’s action. For example, in the Enron’s scandal, the CEO was pointing his finger at CFO about the financial misreporting.
In reaction to that, SOX Section 302 requires that all financial statements from publicly trading companies signed by the CFO and the CEO of the company. SOX main objective is about disclosure and risk management to the investors.