Integrity is an important element of leadership in the private sector, more so within publicly traded corporations. An important mark of integrity is seeking to do the right thing, even when doing so may not seem in the best interests of the company or its management (Ahluwalia, Ferrell, Ferrell, & Rittenburg, 2018). Most companies can recover from an error in judgment but it is almost impossible to recover from seeking to cover up or bury an error in judgment . The Sarbanes-Oxley Act of 2002 (SOX) is a law that was enacted by the US Congress to ensure that a higher level of integrity was attained and maintained by public corporations (King & Case, 2014). Among the organs created by SOX to effectuate its mandate was the Public Company Accounting Oversight Board (PCAOB) which can be regarded as an oversight system for public company auditors. Under the provisions of SOX , the PCAOB keeps in check those individuals under whose obligation integrity oversight for public companies falls.
Overview of the SOX
The long title for SOX is the Public Company Accounting Reform and Investor Protection Act" according to the US Senate and the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" as per the House of Representatives. SOX, as reflected by the two titles was enacted to govern the oversight of public companies, which is normally undertaken by public accounts (King & Case, 2014). SOX is divided into eight sections each of which deal with a specific area of the processes relating to auditing and management of corporations. The segments can be divided into three main categories. The first category is provisions that ensure that proper audits by competent, certified, and authorized personnel are carried out on public companies (King & Case, 2014). The second category ensures that full disclosure is made to such auditors to facilitate their activities. The final category ensures that as and when wrongdoing is discovered within a corporation, adverse actions are not taken to cover up or bury the wrongdoing or even retaliate against whistleblowers .
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Section 404 of the SOX Legislation
Section 404 of SOX is related to Management Assessment of Internal Controls and falls under Title IV of the act titled ‘Enhanced Financial Disclosures’. Under section 404, corporations are obliged to expressly declare, in its annual report, how their internal control structures and procedures are set and how effective these systems are (King & Case, 2014). It is not just enough for companies to tell external stakeholders that they are doing their best to evaluate and monitor the activities of the company. Instead, the stakeholders are informed in great detail about who the evaluation and monitoring are being done so that they can make a determination on how safe the internal environment of the company is for themselves. Section 404 of SOX thus makes it easier for stakeholders to decide whether or not to invest in a company by studying its annual reports (King & Case, 2014).
The PCAOB
A critical aspect of SOX is the Public Company Accounting Oversight Board (PCAOB), a not for profit organization that audits public company auditors and stock traders. PCAOB to some extent also falls under the auspices of the U.S. Securities and Exchange Commission (SEC) which approves all its standards, rules, and regulations (Spillane, 2004). The first obligation of PCAOB is the superintendence of auditors of public companies in America. Millions of individual investors have stakes in public companies but cannot have the time or capacity to evaluate and monitor these companies. Instead, they rely on auditors to conduct the evaluation and inform them about it. The integrity, diligence, and honesty of these auditors are thus critical to the process of public investment. PCAOB ensures that auditors diligently and effectively carry out their critical duties of oversight for and on behalf of the public investors (Spillane, 2004). Once the public investors make a determination on how to carry out their investments, they then instruct broker and dealers and rely on them to carry out those instructions. Broker and dealers also offer advisory services to investors who rely on such advice when they carry out their obligations. PCAOB further ensures that the auditing of the broker and dealers is also undertaken as effectively as that of publicly traded companies (King & Case, 2014).
Importance of SOX and PCAOB
An important lesson that came with the Great Depression was that the loss of investor competence can cripple the economy of a nation. Loss of investor confidence led to a market crash in the USA that reverberated in almost all areas of the national and global economy, leading inter alia to bank runs, bankruptcies, job losses, and humanitarian catastrophes. Conversely, the Great Recession created a realization that leaders of public companies cannot always be counted upon to do the right thing. Decisions made by corporate leaders including in publicly traded companies led to adverse ramifications for investors (Solomon, 2016). Most importantly, even when the leaders and auditors realized that all was not well, the information was hidden from the public leading to market crashes and losses worth billions of dollars. SOX in general and specifically PCAOB are both essential and critical for secure public investment (Ahluwalia et al., 2018).
Summary and Conclusion
The research and analysis outlined in the report above emphasize the importance of integrity in publicly traded companies by evaluating SOX and PCAOB as outlined in King and Chase (2014) and Spillane (2004) respectively. Generally, SOX seeks to ensure that the auditing of public companies is carried out faithfully and effectively. PCAOB is a creation of SOX that operates as an umbrella body for auditors of publicly traded companies and stock-brokers. Proper audit not only protects the economy of the country but also safeguards the interests of individual investors. Further, the importance of SOX and PCAOB is canvassed using the Great Depression and the Great Recession as examples of what happens if auditing is not carried out effectively.
References
Ahluwalia, S., Ferrell, O. C., Ferrell, L., & Rittenburg, T. L. (2018). Sarbanes–Oxley Section 406 code of ethics for senior financial officers and firm behavior. Journal of Business Ethics , 151 (3), 693-705
King, D. L., and Case,.C. J. (2014). Sarbanes-Oxley Act and the Public Company Accounting Oversight Board’s first 11 years. Journal of Business and Accounting . 7(1), 11-22.
Solomon, D. (2016). From the great depression to the great recession: On the failure of regulation in the mortgage market. Journal of Legislation . 42 , 162
Spillane, D. K. (2004) PCAOB enforcement: What to expect. The CPA Journal, 74 (9), 32-35.
