10 Jun 2022

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Integrity in Financial Reporting

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Academic level: College

Paper type: Essay (Any Type)

Words: 307

Pages: 1

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Ethical Breeches 

Some ethical violations of financial reporting include the malpractices in write-down and disclosure by Enron by manipulating accounting rules (Lease, 2006). There were also violations by Bernard Ebbers of Worldcom who borrowed money from the company and sold stock in blocks and also created outright fraudulent accounting entries. Such cases among other have increased regulation by Sarbanes-Oxley to protect the interest of shareholders and their rights. Scrutiny has led to the imprisonment of officials in charge. 

Importance of financial Scrutiny 

Financial scrutiny is critical as it increases confidence among shareholders and potential investors. Also, it ensures curbs the intentions and ability of managers and institutions to use funds at the expense of investors. 

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Sarbanes-Oxley Act 

Sarbanes-Oxley Act of 2002 – SOX is an act that protects the interest of investors and prevents the possibility of companies and corporation from engaging in fraudulent activities (Act, 2002). The Act usually requires corporations to make reforms that improve their disclosure processes and prevent fraudulent activities. The act was formed to deal with scandals resulting from companies like WorldCom, Tyco International, and Enron Corporations which led to a loss of investors’ confidence. 

Elements of SOX 

Some of the elements of SOX that protect the integrity of financial statements include SOX Section 302- corporate responsibility for financial reports, SOX Section 409 – Real Time Issuer Disclosures, SOX Section 404 – Management Assessment of Internal controls, and SOX Section 401 0 Disclosures in Periodic Reports. 

The SEC and its role 

The Security and Exchange Commission (SEC) is an independent US government agency formed in 1934 to protects investors, facilitate the formation of capital and maintains orderly functioning of security markets (Johnston & Petacchi, 2017). The agency promotes full disclosure of publicly traded companies. SEC also protects investors from fraud and manipulation. Usually, securities offered in interstate commerce are registered under SEC before they are sold to investors. Also, dealers and advisory firms must be registered under SEC. 

References  

Act, S. O. (2002). Sarbanes-Oxley Act.  Washington DC

Johnston, R., & Petacchi, R. (2017). Regulatory oversight of financial reporting: Securities and Exchange Commission comment letters.  Contemporary Accounting Research 34 (2), 1128-1155. 

Lease, D. R. (2006). From great to ghastly: How toxic organizational cultures poison companies, the rise and fall of Enron, Worldcom, Healthsouth, and Tyco International.  Academy of Business Education, April 6 (7). 

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StudyBounty. (2023, September 15). Integrity in Financial Reporting.
https://studybounty.com/integrity-in-financial-reporting-essay

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