SARBANES-OXLEY ACT

Sarbanes-Oxley Act

Sarbanes-Oxley Act

Introduction

2001-2002 was marked by the Arthur Andersen accounting scandal and the collapse of Enron and WorldCom. Corporate reforms were demanded by the government, the investors and the American public to prevent similar future occurrences. Viewed to be largely a result of failed or poor governance, insufficient disclosure practices, and a lack of satisfactory internal controls, in 2002 George W. Bush signed into law the Sarbanes-Oxley Act that became effective on July 30, 2002. Congress was seeking to set standards and guarantee the accuracy of financial reports.

Viewed as the most significant change to securities laws since the 1934 the Sarbanes-Oxley Act (also known as SARBOX or SOX) sought to address the public concerns through making corporate board members responsible for company accounting statements, it redefines the relationships between corporations and their auditors, and it restructured the internal audit systems of public corporations. The SOX has redefined the corporate accounting world since it was implemented by adopting tough new provisions intended to deter and punish corporate and accounting fraud and corruption, threatening severe penalties for wrongdoers, and protecting the interest of workers and shareholders.

Background on the Sarbanes-Oxley Act

The Sarbanes-Oxley Act was named after co-creators Senator Paul Sarbanes of Maryland and Representative Michael Oxley of Ohio. It was passed by congress in an attempt to restore confidence in American corporations after the multi-billion dollar scandals at Enron and WorldCom as mention above. The Act: Creates a Public Company Accounting Oversight Board (PCAOB), to enforce professional standards, ethics, and competence for the accounting profession; Strengthens the independence of firms that audit public companies; Increases corporate responsibility and usefulness of corporate financial disclosure; Increases penalties for corporate wrongdoing; Protects the objectivity and independence of securities analysts; and Increases Security and Exchange Commission (SEC) resources.

By first establishing the PCAOB, the Act works jointly with the SEC to oversee auditors of public companies with a goal to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports (PCAOB, Our Mission). The Board is funded by fees paid by all public companies, and is granted investigative and enforcement powers to oversee the accounting industry and discipline auditors (Section 109). It also has the authority to regulate auditors of public companies, set auditing standards, and investigate violations of accounting practices. Annual quality reviews will be conducted for firms that audit more than 100 issues, and all other firms will be audited at least once every three years (Section 104).

Board will consist of five members, and only two of the five members may be present or former CPAs. The Board will have several duties, including, but not limited to the following: Register public accounting firms that prepare audit reports for issuers; Establish or adopt, by rule auditing quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. Conduct inspection of registered public accounting firms; Conduct investigations and disciplinary proceedings and impose appropriate punishment; Enforce compliance with the Act; ...