The Sarbanes-Oxley Act of the United States was passed in 2002 with the aim of bringing important reforms in the current financial reporting of the United States. The Act was developed to reinstate public confidence in the management of public companies after the occurrence of the scandals of the WorldCom and Enron. The Act has had serious influence on the responsibilities and liabilities of the board of directors as well as the auditors. There are many advantages of this Act because, since its introduction, it has had several benefits in the financial management of firms and the prevention of fraud. One advantage of the Act is that it helps identify the risks of the same firm doing both the tax service and auditing ( Srinivasan&Chandra, 2014 ). The Act provides an obligation for a firm offering such a service to be approved by the audit committee of a company thus introducing new accountabilities to both the corporate tax department and the audit committee. The other advantage of the Act is that it allows the corporate department of tax to carry out key functions in supporting the audit committee to conduct its responsibilities in relation to tax services. The engagement of the corporate tax department ensures that the tax services are conducted as provided for in the provision.
Also, the Sarbanes-Oxley Act helps disclose crucial information to the shareholders. One of the reasons why this Act was enacted was to protect the shareholders from the shady accounting practices that could lead to the collapse of the company ( Gupta, Sami & Zhou, 2018 ). An example is the collapse of Enron as a result of accounting malpractices which adversely affected the lives of many employees as well as the shareholders. Under this provision, the companies are now required to disclose all the information about their risks, assets, and debts. This information is essential for the shareholders while making their investment decision as they compare with other companies. The Sarbanes-Oxley Act further emphasizes the need to have strong internal control. Under section 404 of this act, it requires the management to test the internal control on either quarterly or semi-annually. This provides a report to show whether the control is efficient and effective. In overall, the Act has led to increased transparency in the tax services and increased internal control that ensures that there are no malpractices from the top management of the firms that could lead to the collapse of the company.
Delegate your assignment to our experts and they will do the rest.
Despite the above benefits of the Sarbanes-Oxley Act, it has various disadvantages which affect the overall efficiency of the management and preparation of financial reports. The first disadvantage is that it calls for the adherence from the business demands for the need to introduce much variety of internal controls to secure the financial information of the company ( Martin, Sanders & Scalan, 2014 ). The internal controls are required in every operation thus the need to have a large number of internal controls which can be time-consuming and could lead to the delay in the timely preparation and presentation of the financial statements. The other disadvantage of the act is that it is costly as it results in the need for extra resources as well as increased audit fees. Section 404 has demands that require a lot of resources to be met, and this could be costly for small corporations which are still struggling financially. Also, it requires the conduct of a large number of audits by independent accounting firms ( Albuquerque & Zhu, 2018 ). The increased number of audits required to be performed can lead to high costs to the business through higher audit costs. This has a huge effect on the final profit of the business, especially the small and new firms that still run at a break even. Also, the Act imposes serious fines on accounting and tax. There are severe fines even on the minor violations which could restrict the certain talent groups if the management wants to avoid future violations.
Since its introduction in 2002, the Sarbanes-Oxley Act has played a key role in the fraud prevention and protection of the interest of the shareholders. Section 404 of the Act provides an early warning sign for the fraud. It reveals the statistical association that exists between the internal control and the future fraud revelation ( Dawson, 2015 ). Recent research has shown that a larger percentage of the fraud is found within the weaknesses of the internal control and thus by providing an early warning, it helps to reveal and prevent any eminent fraud in the financial statements. Section 409 of the Act also requires that the management provides an update to the public whenever there are serious financial matters immediately they happen instead of waiting until the reporting date ( Franzel, 2014 ). This update ensures that the public, as well as the shareholders, remain up to date on the current events of the business which allows them to detect any fraud existence in the final financial statements. By stipulating the requirements on how the financial reports and auditing are to be undertaken, the Sarbanes-Oxley act ensures that all the investors, both from the large and small firms are protected from shady financial statements and fraud that could be committed by the management ( McMahon et al., 2016 ). It acts as a whistleblower for any malpractice within the financial reporting. Severe fines and penalties imposed upon the violation of the act has ensured that the management adheres to the rules thus eliminating any possibility of fraud and presentation of financial statements that are untrue and does not reflect the actual financial position of the business.
References
Albuquerque, A. M., & Zhu, J. (2018). Has Section 404 of the Sarbanes-Oxley Act discouraged corporate investment? New evidence from a natural experiment. Management Science, Forthcoming .
Dawson, S. (2015). Internal Control/Anti-Fraud Program Design for the Small Business: A Guide for Companies NOT Subject to the Sarbanes-Oxley Act . John Wiley & Sons.
Franzel, J. M. (2014). A decade after Sarbanes-Oxley: The need for ongoing vigilance, monitoring, and research. Accounting Horizons , 28 (4), 917-930.
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.
Martin, K., Sanders, E., & Scalan, G. (2014). The potential impact of COSO internal control integrated framework revision on internal audit structured SOX work programs. Research in Accounting Regulation , 26 (1), 110-117.
McMahon, R., Pence, D., Bressler, L., & Bressler, M. S. (2016). NEW TACTICS IN FIGHTING FINANCIAL CRIMES: MOVING BEYOND THE FRAUD TRIANGLE. Journal of Legal, Ethical & Regulatory Issues , 19 (1).
Srinivasan, M., & Chandra, A. (2014). Assessing the Impact of Sarbanes-Oxley Act on the Logistics Industry: An Exploratory Study. Transportation Journal , 53 (1), 44-78.
