The Impact Of Sarbanes-Oxley Act Research Paper Sample
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Introduction. Sarbanes-Oxley Act (SOX) (2002) is considered the most extensive reform in the financial and corporate governance legislation since the pass of US Securities and Exchange Acts and the establishment of the Securities and Exchange Commission (SEC) (Fischer, Gral, & Lehner, 2014). SOX primary aim was increasing the US financial markets’ attractiveness and the public companies’ financial statements (FS) credibility by focusing on transparency, internal controls and fraud prevention. This paper is exploring how this goal was reached and these areas of focus were addressed through SOX impact on different stakeholders’ groups level and the US financial markets level on the whole.
The major changes brought by SOX included introduction of the Public Company Accounting Oversight Board, requirement for implementation of internal controls, increased liability levels of auditors, executives and board members, and enhanced auditors’ independence (Slaughter, n.d.). To focus on those, the paper will analyze the core SOX sections which covered disclosure controls (Section 302) internal controls assessment (Section 404), auditors’ independence(Section 303), and fraud accountability (Sections 802, 906).
SOX precise disclosure requirements made FS more transparent and clear for investors, and the improved quality of FS allowed the US financial markets to regain credibility after Enron, Tyco and WorldCom collapse(Slaughter, n.d.). Both more conservative prudence-based approach to earnings and reduction in intentional misstatement significantly contributed to this improvement. The internal control section (Section 404) with its requirement to set internal control policies as well as introduction of corporate governance standards, opened a new era for public companies. SOX (Section 302) enhanced responsibility of Chief Executive Officers (CFO) and Chief Financial Officers (CFO) for the verification of FS, having imposed on them a responsibility both to prepare a separate report on internal controls with disclosure of any material deficiencies and to ensure accurate financial disclosure (SEC, 2002). Both civil and criminal accountability for the failure to certify FS or certifying non-compliant FS was introduced (Section 906). Apart from that, SOX encouraged the staff participation in risks’ assessment process, having stipulated criminal penalties for retaliation of whistleblowers (Section 802).
Cost-benefit of SOX-required internal controls implementation became the dark side of SOX for public companies as those faced significant costs’ growth due to increase in legal, auditors’ and accounting fees, internal control software, performance monitoring, director’s liability insurance and board compensation (Slaughter, n.d.). After the public debates and the subsequent accounting guidance issue with some amendments for small firms in 2007, the cost-benefit ratio for SOX-compliant companies improved significantly and the costs of both equity and debt finance for them were reduced (Iliev,2009; SEC, 2011)
SOX had a tremendous influence on public companies’ audit. The auditors were no longer able to use former audit strategies but had to require management to identify, document and evaluate significant internal controls (McConnell & Banks, 2003). The additional requirements to audit information enhanced the guidance of SAS 99 (2002), with a particular emphasis on any detail at account balance, class of transactions or financial statements level which may be indicative of fraud. SOX stipulated ethical behavior for auditors and increased their independence prohibiting any undue influence on the auditors’ and public accountants’ work (Section 303).
SOX, with its focus on validity, accuracy and reliability of FS, considerably improved risk management in public companies. The detailed measures applied by SOX to address a whole range of financial, operational, strategic and compliance risks (COSO, 2004) are also separately covered by this paper.
American Institute of CPAs. (2002) Consideration of Fraud in a Financial Statement Audit. Statement on Auditing Standard SAS No 99, AU Section 316 Retrieved from: http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf
COSO Enterprise Risk Management – Integrated Framework (COSO ERM). (2004). Retrieved from www.coso.org
Fischer, B., Gral B., and Lehner, O. (2014). Evaluating SOX Section 404: Costs, Benefits and Earnings Management.ACRN Journal of Finance and Risk Perspectives, 3(1),43-55.
Iliev, P. (2009).The Effect of SOX Section 404: Costs, Earnings Quality and Stock Prices.Journal of Finance. Retrieved from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983772.
McConnell, K.J. & Banks, J.I. How Sarbanes-Oxley Will Change the Audit Process (2003, Sep 1). Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2003/Sep/HowSarbanesOxleyWillChangeTheAuditProcess.htm
Slaughter, J. The Impact of the Sarbanes-Oxley Act on American Businesses. (n.d.). Chron.com.Retrieved from http://smallbusiness.chron.com/impact-sarbanes-oxley-act-american-businesses-1547.html
The Sarbanes-Oxley Act (2002).Retrieved from: http://www.sox-online.com/act.html
U.S.Securities and Exchange Comission (SEC) (2002). A Final Rule: Certification of Disclosures in Companies’ Quarterly and Annual Reports. Retrieved from: http://www.sec.gov/rules/final/33-8124.htm
U.S.Securities and Exchange Comission (SEC) (2011). Studies and Recommendations on Section 404(b). Retrieved from: http://www.sec.gov/news/studies/2011/404bfloat-study.pdf