Introduction
Sarbanes-Oxley Act of 2002, also known as “Public Company Accounting Reform and Investor Protection Act”, is a federal law that focused on creating regulations that focused on enhancing corporate responsibility and accountability (Sarbanes, 2002). The rules defined within the law capitalized on enhancing operations and accountability in all the public companies in America. The main objective of the Act entails improving the reliability and responsibility of the corporate sector. In that case, the lawmakers capitalized on the creation of legislation that would help in minimizing errors in the accounting departments within the public companies. The provisions within the law focused on protecting the investors and the shareholders against fraudulent financial activities that result in poor business performances. Additionally, the legislation capitalized on the establishment of penalties and fines that are offered in the case of noncompliance.
History of the Act
An increased in scandals and fraudulent financial activities within the corporate world during the 21 st century impacted on the performance of public companies within the United States. The fraudulent activities influenced normal business operations, thereby scaring away financial investors and other stakeholders in the business. Considering the increase in the number of cases involving fraud in the public companies, the Banking Committee in the Senate engaged in various hearings that concerned the issues that influence multiple operations within the public sector. The committee focused on addressing factors that contributed to the problems regarding lack of accountability in the public companies. During the hearings, the committee identified various factors such as weak corporate governance and lack of adequate disclosure provisions as the key factors that contributed to the increase in fraudulent activities in the public companies.
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The cases involving fraudulent activities in various public companies resulted in the passing of the Oxley's bill in April 2002. Oxley's bill aimed at curbing the increased instances of fraud in public companies. The laws passed various hearings that focused on ensuring that relevant amendments were defined to capitalize on protecting the investors against incurring losses and focus on enhancing business operations within the public companies. In July 2002, the committee engaging in the hearings of the issue approved the final bill. The passed bill was named the Sarbanes–Oxley Act of 2002. In a bid to support the bill, the congress houses voted in favour of the bill, and it signed into law on July 30, by President George W. Bush. Upon becoming a law, the Act has been in considered as a far-reaching reform in the public company as it helps in enhancing business practices through improved accountability.
Key Provisions
When evaluating the provisions associated with the Act, one can take note of the fact that it is arranged in 11 sections or titles. The two main requirements that are important to note in the Act are Sections 302 and 404, which are vital towards defining the purpose of the law. In Section 302, Corporate Responsibility for Financial Reports, CEOs and CFOs incorporate companies and organizations are given the mandate to review all financial reports. The expectation is that the CEOs and CFOs will seek to ensure that the announcements contain financial information that has been 'fairly presented.' Additionally, they are also expected to make sure that financial information does not include misrepresentations that are likely to affect the accuracy of the data. The responsibility of internal accounting controls is given to both the CEOs and CFOs, who are seen as crucial personnel within any corporate company or organization.
In Section 404, Management Assessment of Internal Controls is another crucial provision within the law that seeks to ensure that corporate company public details associated with their internal accounting controls, as well as, procedures related to financial reporting. The details will be provided as part of the annual financial reports in a bid to determining how these companies are working towards ensuring that they maximize on maintaining accuracy in the information they publish. On the other hand, this provision seeks to provide that all corporate executives within the companies would be expected to certify that the financial statement is accurate personally; thus, meaning that they would be held personally responsible if SEC takes not of any violations in the information published.
Intent (Purpose) of the Sarbanes-Oxley Act of 2002 (SOX)
The main objective of the Act was to aid in overseeing the financial reporting landscape concerning the role of finance professionals working within companies and organizations (Gu & Zhang, 2017). The Act seeks to create a platform for transparency by ensuring that finance professionals, working within the corporate sector, provide revelation of the needed information. Financial reporting remains as one of the critical aspects of consideration in determining the transparency levels of a corporate company or organization, which creates the need for having to oversee this landscape. The enactment of the Act was seen as a significant milestone seeking to ensure that finance professionals maintain high levels of integrity when engaging in financial reporting in a bid to capitalize on accurate and timely information.
The main objective of transparency of the Act is fulfilled by the fact that it seeks to capitalize ion the revelation of information as provided by the professionals working within the corporate environment (Basile, Handy, & Fret, 2015). Additionally, the purpose has also been fulfilled by the fact that the Act seeks to ensure that finance professionals adhere to guidelines associated with the Generally Accepted Accounting Practices. The practices seek to define how professionals in the finance sector are expected to operate while establishing a clear front through which to determine the threshold. The enactment of the Act was only seen as an approach through which to ensure that the guidelines associated with these practices are adhered to in every aspect of financial reporting. That means that any finance professional that does not adhere to the instructions provided would be contravening provisions of the law.
Another critical aspect to note evaluating the Act is that it capitalizes on revealing the financial details for all the transactions that may not have been mentioned within the balance sheet. When preparing a balance sheet, finance professionals often find themselves not being able to provide details associated with each of the transactions. Consequently, this means that the balance sheet only provides a tentative overview of the transactions as they relate to the financial landscape within the corporate company or organization in question. That paves the way for the provisions in the Act, which are fulfilled by the need for finance professionals to provide a disclosure of financial control measures as they relate to the corporate companies. The intention is that this will aid in providing a clear understanding of the financial landscape for the company being evaluated.
On the other hand, the Act’s purpose was to increase the responsibilities for audit committees, primarily focusing on the role of public auditors who are engaged in auditing information touching on corporate companies and organizations. The Act places regulatory control of federal auditors on the Securities and Exchange Commission, which aids in the formation of the Public Company Accounting Oversight Board (Chhaochharia, Grinstein, Grullon, & Michaely, 2016). The expectation is to ensure that public auditors operate in a manner that is not only justified but can also be verified. The role of the commission and, in extension, the board is to certify public auditors while seeking to evaluate their capacities to deliver while enhancing the integrity of the information that they provide. If an auditor is involved in providing inaccurate information, he or she is held to account by the board, which has the authority to decertify him or her depending on the information gathered.
The establishment of the Act was also expected to help in protecting potential investors from the possibility of encountering corporate companies and organizations that are involved in fraudulent accounting activities (Zhang, 2007). Before making an investment, investors often evaluate a company’s financial and accounting information to determine whether their investments would yield positive results. Before enactment of the Act, it was common to encounter instances where some of the investors found themselves investing in companies that were engaged in fraudulent accounting activities. That meant that some of the investors found themselves experiencing challenges in trying to recoup their investments, taking into account that the financial information provided does not represent the actual financial landscape.
It is from this perspective that the purpose of the Act is fulfilled, considering that it seeks to create an avenue through which to ensure that finance professionals in the companies work towards providing accurate information. For the investors, this means that they would be in a position allowing them to make sound investment decisions that reflect on a reliable financial landscape. The long-term effect that the law is expected to have is that it is expected to create a provision through which to ensure investors, both foreign and local, gain confidence in the financial information that they are provided. The law was meant to cushion investors from possible loses arising from inaccurate information that may have severe implications for investor confidence leading to a poor corporate standing.
Conclusion
Sarbanes-Oxley Act of 2002, which is also referred to as "Public Company Accounting Reform and Investor Protection Act", focuses on creating regulations that focused on enhancing corporate responsibility and accountability. The primary purpose of the Sarbanes-Oxley Act of 2002 was an aid in overseeing the financial reporting landscape concerning the role of finance professionals working within companies and organizations. The transparency purpose of the Sarbanes-Oxley Act is fulfilled by the fact that it seeks to ensure that there is a revelation of information on the part of finance professionals working within the corporate environment.
References
Basile, A., Handy, S., & Fret, F. N. (2015). A Retrospective Look at the Sarbanes-Oxley Act of 2002-Has it accomplished its original purpose?. Journal of Applied Business Research (JABR) , 31 (2), 585-592.
Chhaochharia, V., Grinstein, Y., Grullon, G., & Michaely, R. (2016). Product market competition and internal governance: Evidence from the Sarbanes–Oxley Act. Management Science , 63 (5), 1405-1424.
Gu, Y., & Zhang, L. (2017). The impact of the Sarbanes-Oxley Act on corporate innovation. Journal of Economics and Business , 90 , 17-30.
Sarbanes, P. (2002). Sarbanes-Oxley act of 2002. The Public Company Accounting Reform and Investor Protection Act. Washington, DC: US Congress .
Zhang, I. X. (2007). Economic consequences of the Sarbanes–Oxley Act of 2002. Journal of accounting and economics , 44 (1-2), 74-115.
