REGULATORY MEASURES

Regulatory Measures



Regulatory Measures

Introduction

Sarbanes-Oxley Act was enacted in 2002 in view of the fall of public confidence in large corporations (such as Enron) who had filed for bankruptcy overnight. The Act follows a rule based approach which means either it has to be complied with in full or not. There is no scope for subjective exceptions. Such scandals resulted in demise of confidence public had on auditing firm who had expressed reasonable assurance that the company is going to operate in foreseeable future. The Act was unanimously passed by the Congress and the Senate. The Act also gives birth to a new board Public Company Accounting Oversight Board (PCOAB) (Soxlaw, 2013).

Discussion

Evaluating its effectiveness in minimizing fraud

The Act has been very effective in minimizing fraud as it imposes strict penalties for white collar crimes, requires companies to develop, implement and review a system of effective internal controls, prevents and restricts insider dealing. Its effectiveness is further enhanced by imposing strict rules on audit practicing firms and laying great emphasis on corporate disclosures. With strict internal controls in place and cultivating further independence and objectivity in the role of external auditors a fraud can be minimized to a great extent. Arthur Anderson was considered to be among the top five audit firms of its time, but its impairment to objectivity and the subsequent corporate collapse of Enron and other corporations resulted in its demise. Increasing the monetary penalties for white collar crimes has acted as a deterrent for those who had evil intentions. Increased financial reporting disclosures prescribed by the act has revitalized and restored investor confidence (Reingold and Toffler, 2004). To prevent fraud, Sarbanes-Oxley Act requires public interest companies to design, implement, document, and monitor and test internal controls on an ongoing basis. Such a proposal will help in preventing management and financial fraud. Preventing such frauds will protect the investors and their investment and restore market confidence. Another way of minimizing fraud is via imposing strict penalties. For the fear of being convicted of a felony an individual will be deterred from acting in an unlawful way. All in all it can rightfully be stated that Sarbanes-Oxley Act has been pretty effective in preventing fraud. Despite its success it needs certain improvements. The Act only talks about development of internal controls but provides little guidance on it. Lack of uniform procedures will result in added costs for corporations who have to develop their own controls. Thus, the Act should be updates to counter this deficiency (Ge and McWay, 2005).

Impact on auditing firms and public accounting professions of Sarbanes-Oxley Act

The auditing and accountancy industry has been directly affected by the Sarbanes-Oxley Act. The auditing and accounting standards have been established by the Act through Public Company Accounting Oversight Board (PCOAB). Audit firms are now required to get them registered with PCOAB and pay them annual fees. On annual basis, PCOAB conducts quality reviews if an audit firm has been involved in more than ten audits that ...