THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act



The Sarbanes-Oxley Act

Introduction

The Sarbanes-Oxley Act (SOX) were enacted in July 30, 2002, by Congress, to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence. In protecting the shareholders and the general public, the SOX Act is intended to improve the transparency of the financial reporting. Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a disadvantage of this act; and changes that still need to be incorporated.

Analyze the new or enhanced standards for all U.S. public company boards, management, and public accounting firms that the SOX required. The Chief Executive Officer (CEO) of a public company is the executive with the chief decision-making authority in an organization or business. The Chief Financial Officer (CFO) of a public company is responsible for directing and coordinating the financial activities of the firm. CEOs and CFOs have a fiduciary duty to the owners and to the stakeholders in the public companies. The Sarbanes-Oxley Act (SOX) of 2002 were created to strengthen corporate governance, leading to more credible oversight both externally and internally (Rehbein, 2010). According to Richard Orin, the act constituted a daring effort to legislate morality, with the goal of restoring integrity to and public confidence in the financial markets (2008). There is evidence that the SOX regulations have led to more disclosure and information, benefiting market participants, lowering the cost of capital, and providing more accurate information about the performance of executives such as the chief executive officer and chief financial officer (Rehbein, 2010).

The implementation of effective business ethics became essential and, the new law required the publication of corporate codes of ethics. It did not mandate their content (Orin, 2008). The way the act aimed to prevent unethical business practices. CEOs and CFOs have greater incentives to avoid using their discretion to overstate earnings and to be more conservative when faced with increased uncertainty and legal liability. Section 406, which directs us to adopt rules requiring a company to disclose whether it has adopted a code of ethics for its senior financial officers, and if not, the reasons therefore, as well as any changes to, or waiver of any provision of, that code of ethics. The Code of Ethics requirement provides a blueprint for internal corporate governance: one that formally delineates standards of acceptable conduct for all of a corporation's officers, directors, and employees, including its internal accountants (Orin, 2008).

Examine why the new enhanced, standards are necessary.

The SOX Act of 2002 is generally concerned with enforcing laws designed to reduce corporate fraud, especially in the area of financial reporting. Section 406 of SOX requires public companies to disclose if they have codes of ethics and to disclose any waivers of those codes ...