With the significant corporate fraud cases of WorldCom, Enron, and Tyco it would be sensible for organisations to have a mechanism to prevent frauds from occurring within the firm. However, most organisations have not changed their fraud prevention and detection procedures and policies. Primarily, the Sarbanes-Oxley Act is a document that is thought to be the answer to fraud, but the late fraud activities indicate otherwise. The Act was enacted in 2002, and it brought about a compressive reform in the financial practice. The act mainly intended to push publicly held or listed organisations their financial reporting audits and controls to be performed by external auditors. The Act responded to the widespread of fraud at Enron and other prominent organisations and introduced new standards for corporate boards directors, organizational management, and public accounting firms.
With the organization having its Initial Public Offer (IPO) there are some regulations within the Sarbanes and Oxley act the firm needs to adhere to mainly the Sections 302, 401, 404, 409, and 802. The compliance of the Sarbanes and Oxley legislation should not be a daunting task. This is because like other regulatory requirements the Act should be addressed via proper study, analysis, and methodically ( Lin, Sappington, Ohlson, & Kim, 2015 ) . Similarly, like other acts, some of the sections of the regulations are more compliance than others. In the process of meeting the requirement of the statute, there are several important sections which include:
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Sarbanes and Oxley Section 302
Section 302 of the Sarbanes-Oxley Act looks at things about corporate responsibilities for financial reporting. The article mainly states that the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) are primarily responsible for the documentation, submission, and accuracy of all the financial reports and the internal controls of the organization ( Abdioglu, Bamiatzi, Cavusgil, Khurshed, & Stathopoulos, 2015 ). The section requires that:
The signing officer of the documents has reviewed the report.
The report should not have or contain any material misstatements, omission, or information considered misleading ( Gupta, Sami, & Zhou, 2018 ).
The financial statements and other information provided should present fairly the financial condition of all material aspects ( Lin, Sappington, Ohlson, & Kim, 2015 ).
A list of all the deficiencies contained in the information and internal controls on any fraud activity involving an employee who was part of the internal operations.
Additionally, any important changes in the internal controls that could have negatively impacted on the accuracy of the internal controls ( Cheeseman, 2016 ).
Moreover, the signing officer should have evaluated the internal controls and is responsible for making sure they work effectively and efficiently.
Sarbanes and Oxley Section 401
The section mainly deals with enhanced financial disclosure and disclosure in the periodic reports. The article requires that the information that is reported should be accurate and presented in a way that contradicts other information or gives incorrect information.
Disclosures required: the part indicated that the information provided should be amended to include the following:
The accuracy of the financial reports: all financial statements should be prepared according to the Generally Accepted Accounting Principles (GAAP) ( Lin, Sappington, Ohlson, & Kim, 2015 ).
Off-Balance sheet transactions: the organization on each annual year shall report all the material off-balance sheet arrangements ( Cheeseman, 2016 ). Transactions, relationships, obligations, of the issuer with the unconsolidated entities.
Commission rules on proforma figures. Organisations are mandated to provide pro forma financial information that is included in other reports in under the securities law.
The information contained is not untrue statement of the material fact
Moreover, reconciles the financial conditions and it is issued under the GAPPs.
Sarbanes and Oxley Section 404
The section is the most expensive and complicated to implement for compliance as it touches on important areas of the act. The article states that the management is responsible for the adequate internal control structure ( Ge, Koester, & McVay, 2017 ). Moreover, the administration must ascertain the effectiveness of the control structures and all the possible shortcomings in the controls should be reported ( Gupta, Sami, & Zhou, 2018 ). Furthermore, a reputable and registered external auditor must verify the accuracy and the effectiveness of the organization's internal controls.
Sarbanes and Oxley Section 409
The section is mainly concerned with real-time issuer disclosures. The issuers of the financial information are required to update the public urgently on details concerning the material change that may affect the operations and the economic conditions of the firm ( Cheeseman, 2016 ). Additionally, the disclosures are supposed to be represented as an easy to understand supported qualitative information and trend of graphic presentations as appropriate.
Sarbanes and Oxley Section 802
This section of the Act is one of the most important as it deals with corporate and criminal fraud accountability. The article mainly imposes fines and penalties of up to 20 years of imprisonment for mutilating, falsifying records, concealing, destroying, documents or other tangible objects with the intention of influencing legal investigation ( Lin, Sappington, Ohlson, & Kim, 2015 ). Further accountants who willingly or knowingly violates the requirements of review paper or audit papers for five years to be imprisoned for ten years.
To sum up, the above sections of the Sarbanes and Oxley act of 2002 are crucial in ensuring that the organization stays within the requirements of the law as it intends to go public. It is important that the organization give the true and correct information to the public concerning it economic condition as falsifying such information can result in jail terms. Additionally, the organization should also include external auditors to check on the accuracy of he internal controls and also check if the financial statements presented are correct.
Reference
Abdioglu, N., Bamiatzi, V., Cavusgil, S. T., Khurshed, A., & Stathopoulos, K. (2015). Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act. International Business Review , 24 (5), 902-915.
Cheeseman, H. R. (2016). Legal environment of business: Online commerce, business ethics, and global issues . Boston: Pearson.
Ge, W., Koester, A., & McVay, S. (2017). Benefits and costs of Sarbanes-Oxley Section 404 (b) exemption: Evidence from small firms’ internal control disclosures. Journal of Accounting and Economics , 63 (2-3), 358-384.
Gupta, P. P., Sami, H., & Zhou, H. (2018). Do Companies With Effective Internal Controls Over Financial Reporting Benefit From Sarbanes–Oxley Sections 302 and 404? Journal of Accounting, Auditing & Finance , 33 (2), 200-227.
Lin, H., Sappington, D. E., Ohlson, J. A., & Kim, S. (2015). We examine whether the regulatory changes required by the Sarbanes–Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX... Review of Accounting Studies , 20 (1), 436-469.
