Ethics is a necessity in ensuring that businesses are managed and operate within the stipulated laws and regulations. The Sarbanes Oxley Act of 2002, is one of the laws passed by the Congress to limit defrauding and other accounting errors that have crippled big organizations to the dismay of the shareholders (Wagner, & Dittmar, 2006). The Act aimed at limiting such irregularities in American publicly traded companies to help restore the trust lost following the fraud scandals at WorldCom and Enron (Hanna, 2014). SOX would ensure that investors were willing to invest capital in American companies hence stipulated elements to be followed in maintaining integrity within the financial and accounting of companies.
SOX dictates the mandatory formulation of the independent and competent audit committee. The Act needs that every affiliate of the committee to be a member of the board of directors of the organization but must be independent. The term independent is defined and having no self-interest, not being in the company’s management, and should not receive any financial compensation following the audit (GuideStar, 2003). Emphasis on independence will aid the auditors to be fair and not to be influenced by top management officials who may try to hide accounting errors (Wagner, & Dittmar, 2006). The element is important in ensuring that the investors and board members are always aware of the financial standing of their company.
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SOX also disallows loans to any executives or directors of the company. The main idea behind this element is based on limiting conflicts of interests and insider transaction which may lead to the executives or directors loaned to be against increased interest rates which would otherwise have been enacted (GuideStar, 2003). The Act protects fraud inform of excessive benefits that are commonly used to help private or personal inurement with severe penalties to ensure it protects shareholders from fraud and it has caused many troubles in the past.
References
Hanna, J. (2014, March 10). The Costs And Benefits Of Sarbanes-Oxley. Forbes . Retrieved August 2, 2017 from, https://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/#65276890478c
GuideStar. (2003, March). The Sarbanes-Oxley Act and Implications for Nonprofit Organizations. GuideStar.org . Retrieved August 2, 2017 from, https://www.guidestar.org/Articles.aspx?path=/rxa/news/articles/2003/sarbanes-oxley-act-and-implications-for-nonprofit-organizations.aspx
Wagner, S., & Dittmar, L. (2006, April). The Unexpected Benefits of Sarbanes-Oxley. Harvard Business Review . Retrieved August 2, 2017 from, https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
