The Sarbanes- Oxley Act of 2002, also known as the SOX Act or the Corporate Responsibility Act of 2002, was passed in July 2002 by the United States Congress to protect investors from false reporting by financial institutions (Hanna, 2014). The passing of the law resulted in the imposition of strict operational regulations and punishment for those who broke the law.
The need for the regulation arose from several financial scandals, which were witnessed between 2000 and 2002. Some of the notable scandals that occurred during this period include Enron Corporation, WorldCom, and Tyco International Plc. Consequently, most potential investors lost the trust of financial statements and reporting by publicly traded companies, thereby creating the need for reforms (Hanna, 2014). As a result, most companies were required to have audit committees to conduct internal financial control. The directors and officers involved in preparing and reporting the financial statements were made personally liable in case of non-compliance.
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SOX's Impact on the Relationship Between Businesses and Financial Institutions
Since the Sarbanes- Oxley Act implementation, there has been an improved business relation and cooperation between financial institutions and individual businesses. That is attributed to more transparent reporting, which the financial institutions can use for effective assessment of companies' performance. According to Chu and Hsu (2018), the internal audit and control processes have also been improved, which has subsequently boosted the confidence of financial institutions when cooperating with individual businesses.
However, it is also noteworthy that since the implementation of SOX's Act, the number of Initial Public Offerings (IPO's) has reduced, since some companies have opted to remain private in light of the new regulations and cost of compliance with the Act (Hanna, 2014). Nonetheless, most of the companies affected in this regard are primarily smaller organizations, which are less liquid and, to some extent, more prone to fraudulent financial activities. Therefore, this is still a win for financial institutions.
Comparison between Financial and Managerial Accounting
The main objective of managerial accounting is to produce information that can be used in running the company, such as in strategic management, setting targets, improving the overall business efficiency, etc. (Woodards, 2015). On the other hand, whereas financial accounting may be used for internal business operations, its main objective is to provide information to other interested parties outside the company. It is done to disclose the performance of a business for investors, industry regulators, and creditors.
In terms of their legal status, managerial accounting records are prepared and circulated internally within a business. Therefore, each company can create its rules governing the managerial reports (Woodards, 2015). Contrarily, financial accounting reports such as income statements, balance sheets, cash flow statements are highly regulated since they are released to the public.
In managerial accounting, the information is derived from past and present performance, and predictions for future outcomes, to aid in making business decisions (Woodards, 2015). Contrarily, financial management derives its information primarily from historical data, since forecasting is not allowed in financial statements.
Impact of SOX on Managers, Managerial Accountants, and Reporting Regulations
With the implementation of the Act, there were significant changes in the management's responsibility regarding financial reporting. First, all the top managers must personally certify the credibility and accuracy of the reports before they are released. In the case of false reporting, these managers risk facing a jail term between 10 and 20 years. Additionally, such cases can result in the managers and managerial accountants losing their bonuses or profits from selling the company's stock.
Additionally, the Act reinforces the disclosure requirement since companies must disclose all information, including those that are off-balance sheets such as special purpose entities or Pro-forma statements. Moreover, they are also to give an outlook of the company's performance using Generally Accepted Accounting Principles (GAAP).
In conclusion, the Sarbanes- Oxley Act of 2002 has been beneficial since it increased the reporting standards, thereby improving organizations' financial transparency. However, it is costlier to implement and has resulted in additional responsibilities for top management and financial accountants.
References
Chu, B., & Hsu, Y. (2018). Non-audit services and audit quality---the effect of the Sarbanes-Oxley Act. Asia Pacific Management Review, 23(3), 201-208.
Hanna, J. (2014). The Costs and Benefits of Sarbanes-Oxley. Retrieved September 8, 2020, from https://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/#733766c9478c
Woodards, S. (2015). Managerial Accounting Vs. Financial Accounting. Retrieved September 8, 2020, from https://www.academia.edu/21704854/Managerial_Accounting_vs_Financial_ Accounting#:~:text=Managerial accounting determines the cost, in their decision-making processes.
