International Accounting: The Sarbanes-Oxley Act

Abstract

This essay is about the Sarbanes-Oxley Act of 2002 that was enacted for the purpose of addressing the fraudulent behaviour of business executives who engaged in falsification of company records for selfish gains. The Act’s eleven elements are discussed herein discussed. Finally, the corporate issues that the Sarbanes-Oxley Act was enacted to address are briefly explored.

The Sarbanes-Oxley Act

The Sarbanes-Oxley act of 2002 is a bill that was sponsored by US Senator Paul Sarbanes and Michael G. Oxley, a US representative, in response to several fraud scandals affecting major corporations such as Enron and WorldCom (The Sarbanes-Oxley Act, 2002). The law sets out new standards and made some adjustments to the existing accounting and auditing standards for public accounting firms, boards of directors and management of US companies. The Act increased the responsibilities of boards of directors and management to include certification of their company’s books of accounts and responsibility for inaccuracies within the financial statements. The Act also increased the severity of penalties for fraudulent financial reporting by the entities. The independence of external auditors was also strengthened by the Act (The Sarbanes-Oxley Act, 2002).

Major Elements of the Sarbanes-Oxley Act

The Sarbanes-Oxley Act contains eleven sections. The first section establishes the Accounting Oversight Board for Public Companies (AOBPC) to oversee the work of audit firms by registering auditors, specifying audit procedures, quality control and enforcing compliance by firms. Standards for external auditing are specified in the second section of the Act to ensure that auditors conduct their work with no self-interest threat. The corporate responsibility section specifies that the role of ensuring the accuracy of financial information is that of the senior executives of the company who should approve, on a quarterly basis, their company’s financial statements. The Act also increased public companies’ disclosure requirements in their financial statements. Another section of the act requires securities analysts to disclose any form of potential conflicts of interest.

The sixth section is about Commission Resources and Authority, stating the requirements for practicing as an intermediary in the company’s securities. The next section empowers the Securities and Exchange Commission to conduct studies and report their findings on issues such as securities violations. The eighth section is about criminal and corporate fraud accountability and gives protection to whistle-blowers as well as defining penalties for fraudulent manipulation of company records. Another section of the Act is about the enhancement of white collar crime penalties; increasing penalties associated with white collar jobs and recommends strong guidelines for sentencing such offenses.

The next section is about corporate tax returns which should be signed by the Chief Executive Officer. Finally, the corporate fraud accountability section defines what is corporate fraud and links specific offenses to specific penalties (Kuschnik, 2008).

Societal Values that Sarbanes-Oxley Act Attempts to Change

The values that the Sarbanes-Oxley Act attempts to change includes the auditors’ conflicts of interest, boardroom failures, securities analysts’ conflict of interest, inadequate funding of the SEC, poor banking practices as well as executive compensation. The Act regulates the auditing function so as to strengthen the independence of external auditors because the scandals involving massive money fraud showed that the board members failed to exercise their responsibilities as required by law. The Act identifies that providing security analyst services as well as banking services constitutes a conflict of interest. The Act also allocated more funds to Securities and Exchange Commission for its effective functioning.

Sourcing for loans from banks gives confidence to investors as this indicates a going-concern signal and this is what misled investors in Enron resulting in heavy losses of their investments, an issue that the Sarbanes Oxley Act seeks to address. Stock options and bonuses to managers was seen to increase pressure on them to manage their businesses well and meet their targets.

Conclusion

It is certain that the Sarbanes-Oxley Act was devised in order to address important issues that occur because of the divorce of ownership and the management of public corporations. The act will assist many corporations to safeguard the assets of the shareholders by deterring fraudulent actions by the managers.

References

Kuschnik, B. (2008) The Sarbanes Oxley Act: ‘Big Brother is watching’ you or adequate measures of corporate governance regulation?. Rutgers Business Law Journal, 5, 65-95.

The Sarbanes–Oxley Act (2002). Web.