Free Sarbanes-Oxley Act Research Paper Sample

Type of paper: Research Paper

Topic: Audit, Company, Finance, Law, Business, Corporation, Committee, Management

Pages: 6

Words: 1650

Published: 2020/11/24

Research paper

In connection with the accountability and transparency of companies and non-profit organizations people often mention the Sarbanes-Oxley Act. The Sarbanes-Oxley Act was signed by President Bush in 2002. This event is considered one of the most significant in the history of the country's federal legislation on securities in the last 60 years. The law significantly tightens the requirements for financial reporting and its preparatory process, enhances the role of the members of the Board of Directors in the supervision of financial transactions and audit processes of public companies. The emergence of such a law is associated with numerous corporate scandals caused by the dishonest behavior of managers of large companies, including the defunct corporation "Enoron", known for its corporate fraud.
The law named after its founders - Senator Paul Sarbanes (Democratic Party) and Michael Oxley (Republican Party) - consists of 11 sections, including comprising additional requirements for boards of directors of corporations and obliging the Commission on Securities (The Securities and Exchange Commission, SEC) to make sure that market players follow the provisions of the law. The law also claimed a new organization - the Supervisory Board (The Public Company Accounting Oversight Board, PCAOB), responsible for monitoring, regulation, inspection of audit firms. The issues of auditor independence, corporate responsibility, full financial transparency, conflicts of interest, corporate financial reporting and other things are considered in it. The law applies not only to public companies in the US, but also to all companies (established in the United States and any other country), who have shares or debt securities registered within the US Securities and Exchange Commission. (Debra, 1-6)

The influence of Act on non-profit sector

For the non-profit sector, which is under constant pressure from society due to the increasing requirements for financial accountability and transparency, Sarbanes-Oxley has become a kind of guide to action. The law regulates the activities of the Audit Committee, which oversees the activities of the external auditor under Board of Directors of the company. Act requires that each member of the committee has to be also a member of the Board and at the same time independent, i.e. not receiving compensation from the company. In addition, the committee should include at least one financial expert. If there is no such a specialist, the company should explain his absence. Many non-profit organizations, even if not carry out an external audit, often have under the Board of Directors one or more committees dealing with financial matters. Large NPOs actually have audit committees that monitor the process of conducting the annual external audit. Requirements of the law ensure the independence of members of the audit or financial committees of NPOs and financial competence of such bodies.
The law regulates the liability of auditors. It requires that the main specialist of the audit firm should be replaced every five years. It is not necessarily to change the company, however, and this way is possible. In addition, the audit firm can not provide services other than audit together with the audit services. The auditing firm must also report to the audit committee in accordance with the basic auditing policy and practice. Non-profit organizations should be careful about a practice of changing auditors every five years, which allows avoiding the corruption and biased attitude on the part of the auditor. NPOs are also advised not to use the audit and non-audit services of one firm.
According to the Sarbanes-Oxley Act, executive and financial directors of public companies are required to certify the balance sheets, confirming their relevance and compliance with the actual financial situation of the company. Non-profit organizations are also encouraged to introduce the practice of certified balance sheets by financial director. Executive director of the NPO does not always understand financial matters, so his participation in the certification is not mandatory. However, he should be responsible for the reports.
The Sarbanes-Oxley Act also regulates insider trading and liquidation procedure of documents; prevents the occurrence of a conflict of interest, prescribes information disclosure and transparency and the protection of those who report about violations and abuses. This Act helps to increase the level of control within the organization and provide the necessary level of transparency. (Kathryn, 371-373)

Corporate governance and transparency of companies

Particular attention in the Act is paid to issues of corporate accountability and measures for ensuring its accuracy. In particular, it provides an extension, increase of the efficiency of disclosure of financial information on companies. To this end, the Securities and Exchange Commission (SEC) is prescribed to develop rules regulating the financial reporting of all relevant information necessary to evaluate by steak-holders the company's financial position, results of operations, liquidity, capital expenditures, resources and significant items of income and expenses. The law obliges public companies as soon as possible to provide information about significant changes in its financial position or operations.
As part of improving the reliability of financial reporting, significant role is given to the audit. All public companies should organize audit committees, which are solely responsible for the appointment, fees and control of auditors. The auditor shall promptly inform the audit committee about the most important elements of accounting policy, possible options for accounting, as well as any disagreements between the auditor and management of the company on the issues of accounting and financial reporting.
With regard to the requirements for auditors, they must provide verification and approval of the audit reports by one or two partners, as well as approval of the issued conclusion by a qualified expert. The auditor should also perform testing of the structure and internal control procedures of the customer and on this basis to assess the adequacy of the structure and procedures of internal control management of reliable accounting, capable of serving a sufficient basis for financial reporting.
A number of requirements are applied to the Securities and Exchange Commission (SEC). It should systematically (at least once every three years) verify information (including financial statements) posted by companies whose securities are quoted at the Exchange or are traded through the system NASDAQ. Particular attention should be given to companies with large market capitalization, growing companies with a disproportionate ratio of share prices and profits, as well as companies that have a significant impact on any sector of the economy. (Don E. Garner, 58-63)

Impact on the internal audit

Fraud and violations of the law
One of the objectives of the audit becomes detecting and preventing fraud within the company. An audit can detect fraud and other violations of the law, but above all a function of the audit remains risk assessment and fraud protection systems, ranging from potential conflicts of interest and ending with the general atmosphere in the department of the company. The focus of internal audit will monitor on the division of responsibilities, the horizontal and vertical financial analysis, monitoring of accounts receivable and bad debt write-offs, special attention should be paid to personal relationships between employees. Increasingly important in today's world is information security and protection of personal data of employees or customers.

Deprivation of directors and officers the right to incentive compensation or securities

In if the company have to re-submit the financial report due to significant deficiencies of the issuer of any financial reporting requirements, manifested as a result of official misconduct, its Chief Executive Officer (CEO), as well as Chief Financial Officer (CFO) deprive the right to incentive compensation or securities, as well as income from sales of securities of the issuer within 12 months from the date of publication of the financial statement. (Article 304 of the Act). In that case, if such officials for a period of 12 months after publication or filing a document to the SEC already received listed compensation, they must return them to the issuer.

Consequences of the Sarbanes-Oxley Act

After the adoption of the Sarbanes-Oxley Act in the US corporate sector, the tendency, especially among small and medium-sized firms, of seeking the services of private securities markets, i.e. markets that do not fall under the regulatory provisions of the Federal Commission on Securities and Exchange, has grown. According to the assessment of the private Committee for Regulation of capital created at the expense of American corporations in 2006, in 2005 through the channels of private markets securities were invested 200 billion dollars. Only large institutional investors and wealthy investors, including wealthy families have direct access to this market.( Committee on Capital, 34)


Debra De Vay. (2006). The Effectiveness of the Sarbanes-Oxley Act of 2002 in Preventing and Detecting Fraud in Financial Statements.
Kathryn A. Agard. (2011) Leadership in Nonprofit Organizations: A Reference Handbook
Don E. Garner, David L. McKee, Yosra AbuAmara McKee.(2008) Accounting and the Global Economy After Sarbanes-Oxley
Robert R. Moeller.(2008) Sarbanes-Oxley Internal Controls: Effective Auditing with AS5, CobiT, and ITIL
Anne M. Marchetti. (2005).Beyond Sarbanes-Oxley Compliance: Effective Enterprise Risk Management
Committee on Capital Markets Regulation. Interim Report of the Committee on Capital Markets Regulation. (2006).

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