Analysis of the Sarbanes-Oxley Act
September 7, 2014
Analysis of the Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 was written to prevent fraudulent reporting of financial statements which are used to make a company’s performance seem better than it actually is to its investors. The details of the act creates penalties and fines for the presentation of false information and holds the handlers of that information accountable such as the company’s auditing firms, CEO and CFO. All financial reports presented by a public company must also have certifications from the company attesting to the accuracy of the information presented through the use of internal controls (" Sox-Online: The Vendor-Neutral Sarbanes-Oxley Site ", 2012). The SOX Act has several key sections which will be evaluated to determine their effect of future fraud.
Section 201 outlines services that may not be performed by a registered public accounting firm if they are also responsible for auditing that client’s financial reports. The accounting firm may not perform bookkeeping or other related services to the audit client, or any other service that the Board determines. However non-audit services can be preapproved by the board and exemptions may be granted if it is deemed public interest or in favor of investor protection (" Sox-Online: The Vendor-Neutral Sarbanes-Oxley Site ", 2012). In effect, Section 201 has reduced the opportunity for the manipulation of information because the audits are conducted by persons external to the corporation who have no impact on the business’ financial reports prior to the audits. While section one does adequately prevent conflict of interests between companies and auditing firms, the companies are still free to select their own auditor or auditing firm. By being able to use the same auditing firm year after year companies can build relationships with their auditors so that some details are overlooked either deliberately or habitually.
According to " Sox-Online: The Vendor-Neutral Sarbanes-Oxley Site " (2012), corporate responsibility regarding financial reports is outlined in Section 302. The Section outlines that all companies that file periodic reports under the Securities Exchange Act must have the signing financial officer certify that; he/she has reviewed the report, and to the officers knowledge, the statements are not untrue or does not omit any material which may cause misleading interpretations, and the financial statements fairly present the financial conditions and operations of the company. The signing officers must also implement and maintain internal control that have been evaluated as effective, disclose any changes or fraud that affects the controls, as well as the weaknesses or deficiencies in the operations of said controls. Section 302 also states that movement of a company’s headquarters or reincorporation has no effect of the enforcement of the Act. Future fraud will be prevented by Section 302 because it holds financial officers accountable for any fraud that may be found upon an audit of their financial report. Financial officers therefore have to thoroughly examine reports to uncover any statement that may warrant questioning or penalties in accordance with the law. Unfortunately financial officers may not know every detail within every statement, and may not knowingly present fraudulent information. Therefore the reports published could still be untrue while the officers are precluded for sanctions.
Section 409 of the Sarbanes Oxley Act addresses the timing of companies’ financial disclosure. The section instructs companies to report information concerning material changes in the company’s financial condition or operation on a rapid and current basis in a form that its investors can understand. The Commission is given the power to determine what information is necessary for the investors’ and public’s interests (" Sox-Online: The Vendor-Neutral