The Sarbanes-Oxley Act has a significant impact on a company's internal control because it strengthens internal compliance with accounting standards. The act restores all loopholes in the internal controls, making them effective in detecting fraudulent accounting practices ( Chu & Hsu, 2018) . Since enacting the law, fraudulent accounting practices have been reduced in many companies because internal controls are strong to detect any accounting malpractices.
Sarbanes-Oxley Act improved internal controls' effectiveness by establishing standards that companies must meet when creating internal controls. All internal controls of multinationals must comply with set standards to minimize, detect and prevent fraudulent activities. Besides, the Sarbanes-Oxley reinforced the disclosure of internal controls requirements, making them effective to prevent accounting malpractices by the company ( Chu & Hsu, 2018) . The company, the act has significantly impacted in restoring the effectiveness of accounting practices in multinationals.
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Internal Controls
Internal controls are rules and procedures adopted and implemented by companies to enhance accounting and financial information integrity to improve credibility and accountability, and prevent accounting malpractices ( Chang et al., 2019) . Companies have different internal controls depending on the nature of their work.
Principles of Assessing Internal Controls
These principles aim to assess the credibility and effectiveness of internal controls to ensure all promote the smooth running of the organization. Compliance is used to evaluate whether the internal control of an organization adheres to the internal accounting standard. The transparency principle is also used to assess whether the internal controls can prevent fraudulent financial practices that may lead to organization all losses ( Chang et al., 2019) . The principle of integrity is also used to the effectiveness of internal controls. It evaluates internal controls' ability to ensure that all accounting activities are performed honestly and meet the international accounting standards.
Sarbanes-Oxley Act
The U.S. Congress passed Sarbanes-Oxley Act to protect investors from malpractices such as fraudulent financial reporting by the management. The act was adopted to respond to financial scandals that were rampant in many organizations in the 2000s.
Enron Corporation scandal of 2001 precipitated the Sarbanes-Oxley legislation because the management intentionally disregarded accounting guidelines. In 2001, it was noticed that the company had been accounting loopholes and weaknesses in the accounting systems to hide billions of dollars of debt and overstating corporate profits to assure the management that the company is profitable. The scandal led to the company realizing a loss of $74 which was a significant blow for Enron Corporation. Consequently, Enron's share prices dropped gradually from $90 to $ 1 within one year. A SEC financial investigation disclosed the Chief Executive Officer Jeff Skilling failed to record company debt worth $74 in the balance sheet to make shareholders feel that the company is performing well.
Weak internal controls contributed to the scandals due to the inability to detect the accounting malpractices. An audit conducted found CEO Jeff Skilling and former CEO Ken Lay guilty and was sentenced to different jail terms. The lack of strong internal controls enabled the CEO not to record the company's debt leading to huge loss. External auditing was conducted revealed that the company's internal controls are not effective in detecting all errors and fraudulent activities by the management ( Chu & Hsu, 2018) . As a result, the CEO successfully committed the scandal leading to the loss of billions of dollars. Subsequently, all employees who engaged in the scandal were persecuted for intentionally engaging in fraudulent financial activities, which led to a massive loss. Lay died while Jeff Skilling is serving 20-years of imprisonment.
References
Chang, Y. T., Chen, H., Cheng, R. K., & Chi, W. (2019). The impact of internal audit attributes on the effectiveness of internal control over operations and compliance. Journal of Contemporary Accounting & Economics , 15 (1), 1-19.
Chu, B., & Hsu, Y. (2018). Non-audit services and audit quality---the effect of Sarbanes-Oxley Act. Asia Pacific Management Review , 23 (3), 201-208.
