Free Argumentative Essay On Strengthening Corporate Governance At US Listed Companies.
Discussion of the Sarbanes-Oxley Act and
Its Impact on Financial Reporting
As Apix Printing, Inc. has proven by its own experience, many companies all the world over need access to the funds from outside investors in order to expand their business. One of the common ways to get financing is to offer companies’ stocks to the shareholders in IPOs. However, these shareholders need to have assurance that they invest in the businesses as they have represented themselves in their financial reports. The Sarbanes-Oxley Act (SOX) adopted by the US in 2002 serves this purpose by seeking to improve corporate governance and reliability of financial reporting (Elliott & Elliott, 2009, p. 827), In its preamble it states that its objective is “to protect investors by improving the accuracy and reliability of corporate disclosures” (US Congress, 2002).
Overview of the Sarbanes-Oxley Act
Proposed and enacted following the financial scandals such as Enron and WorldCom, which had shaken the confidence of investors in American corporate governance and accounting practices, Sarbanes-Oxley Act principally covered the following areas (Elliott & Elliott, 2009, p. 826):
Increased regulation of public accounting firms providing audit services,
One of the aims of the Act is to ensure auditor independence. The Act established the Public Company Accounting Oversight Board with a mandate to oversee the audits of public companies. By going public Apix would see its interaction with its audit firm to change. E.g. the Act provides for prohibition of a number of non-audit services such as book-keeping, appraisal, internal auditing, help with accounting systems design to be rendered by the company’s auditor. There is also a requirement for rotation of audit partners. E.g. the lead audit partner of Apix will have to change every five year (Mallin, 2010, p. 45):
The other important section of this Act (Section 404) deals with the Assessment of Internal Controls for financial reporting. In particular it directs management to ensure that a robust internal-control system for financial reporting is in place and to certify its effectiveness in annual reports. In addition to that it places a responsibility upon the external auditors to attest to the management’s assessment and communicate this in their report on the soundness of the financial control system at the company. As Wagner and Dittmar (2006) argue the SOX mandated compliance reviews are aimed at exposing weaknesses and gaps in the procedures, systems and controls surrounding financial reporting.
Initially the most publicized section of the SOX, it requires CEOs and CFOs to own and personally certify that financial reports presented by their companies are in compliance with the relevant laws and provide a true and fair view on the financial affairs of the companies (Mallin, 2010, p. 44). They are also required to confirm their responsibility for appropriate internal control over financial reporting. It was intended that by holding the principal executives personally responsible for their firms’ financial statements, these certifications would cause the CEOs and the CFOs to exercise more diligence in the preparation of the financial statements for the public. As a result, investor confidence in the accounting practices of the US public companies should grow. It should be noted that though SOX sections are rather small in volume, there are numerous detailed guidelines issued by the Securities and Exchange Commission and the Public Company Accounting Oversight Board for the implementation of SOX provisions. Therefore, Apix principal executives including Mary Francis and Timothy Russell should get acquainted with the requirements of SOX, especially its section 302.
Elliott, B. & Elliott, J. (2009). Financial accounting and reporting. 13th ed. UK: Pearson
Mallin, C.A. (2010). Corporate Governance. 3rd ed. Oxford: Oxford University Press.
Securities and Exchange Commission. (2007). Sarbanes-Oxley Section 404: A Guide for
Small Business. Retrieved from http://www.sec.gov/info/smallbus/404guide.pdf
US Congress. (2002). Sarbanes-Oxley Act of 2002. Retrieved from
Wagner, S. & Dittmar, L. (2006). The Unexpected Benefits of Sarbanes-Oxley. Harvard
Business Review. 2006(april).Retrieved from
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