The Sarbanes-Oxley Act, also known as the SOX is a federal law enacted in July 2002 to help combat fraud and improve reliability in financial reporting in public corporations thus restoring investor confidence. Notably, it was after the spectacular failure of corporate governance in giant companies such as Enron and WorldCom that the Congress passed the Act that would protect stakeholders from fraudulent financial practices. The Act provided for the creation of the Public Company Accounting Oversight Board, which is responsible for overseeing the accounting processes in companies. The aim of Act was to restore confidence in corporate governance, and as such, among the 11 sections, Sections 302 and 404 are of particular importance because they have a direct impact on corporations. These two sections ensure there is accountability in corporate governance.
Section 302 entails Corporate Conscientiousness for Financial Reports, which demands the Senior Executive Officers and Chief Financial Officers to review all financial reports and ensure they are accurate with no misrepresentations. The CEOs and CFOs also have a responsibility for the internal accounting controls. Section 404, on the other hand, entails Management Assessment of Internal Controls and it provides that public companies must publish details of the corporations’ internal accounting controls as well as the procedures for financial reporting when publishing the annual financial reports. Corporate executives are also required to ascertain the precision of the financial docu and take responsibility whenever there are violations. As such, these two sections, in particular, have ensured financial accountability in public companies hence restoring confidence in corporate governance.
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When the Act was implemented, it brought various changes in businesses, and it had both proponents and opponents. Business leaders who supported the Act argued that it would improve financial management through strengthened controls, standardized processes, improved documentation, and strong board oversight. The way of doing business changed because there was transparency in financial management. On the other hand, opponents sighted reasons such as unfairly burdening executives with new regulations that will prevent many companies from going public. Particularly, the provisions increased costs for companies due to expenses for annual audits. Therefore, while the Act provided a platform for accountability in businesses, it also has limitations for other companies.
A strategic audit is a significant tool for corporate governance because it helps the corporation's board in various ways. Strategic audit helps to detect fraudulent practices, which have been the reasons for the failure of previous highly-respected companies such as Enron. Corporations can also use the strategic audit to analyze projects that should be addressed; hence meeting the objectives of corporate governance. Moreover, activities of the corporation can be analyzed using a strategic audit to determine areas that require improvement. Therefore, a strategic audit helps in strengthening corporate governance.
