THE SARBANES-OXLEY ACT OF 2002

Sarbanes-Oxley Act of 2002: Capability Of Preventing Accounting Scandals

Sarbanes-Oxley Act of 2002: Capability Of Preventing Accounting Scandals

Introduction

The Sarbanes-Oxley Act of 2002Introduction2001-2002 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). The Board will consist of five members, and only two of the five members may be present or former CPAs.

Auditing and Accounting Standards

The Board will be required to “cooperate on an ongoing basis” with designated professional groups of accountants in connection with auditing and accounting standard-setting. In the area of auditing, each registered public accounting firm is required to:

Prepare and maintain work papers for a minimum of seven years;

Provide for a second ...