Background And Basis Of The Sarbanes And Oxley Act

Sarbanes-Oxley Act
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Sarbanes-Oxley Act
Introduction
The US Congress enacted Sarbanes-Oxley Act in 2002 to protect the interests of investors and American workers from dishonest actions that involved accounting errors made by companies and improve the precision of financial reports from public companies. The law was passed to tackle the rampant public scandals that involved WorldCom, Enron Corporation, Tyco International PLC, and other public companies. Shareholders’ confidence was lost due to incorrect financial records and an increase in demand for regulatory standards. In this paper, it is thus crucial to explore the law, its background, its various sections, and its pros and cons. The main objective of the legislation was rebuilding investor confidence by making public companies to be reliable, transparent, and precise in their financial records so that investors can make the best financial decisions.
Background and Basis of the Sarbanes and Oxley Act
The Sarbanes-Oxley Act (SOX) is a federal law used in the United States to set standards for all boards in various companies, especially companies that have been listed as publicly-traded companies in the US. The legislation was enacted for re-establishing shareholder trust in commercial financial records. According to Coates and John (2007), before the SOX came into law, investors were used to making significant losses due to corporate failures, which were mainly caused by financial impropriety. SOX was deemed as the best way forward, and used to prescribe the authority of the board of directors in all public companies, and included penalties for particular defied misconduct. In addition, SOX required the Securities and Exchange Commission (SEC) to point out the conditions, which will be used to determine how public companies should comply with the law (Kecskés, 2017). The coming of the law into power was considered as a course of action determined on addressing the problems of accounting fraud primarily by attempting to accentuate the accuracy and reliability of company disclosures. The legislation is also essential since it increases the accountability of the individual members of the board of directors and company executives occupying high positions relative to the pre-SOX requirements.
Compliance with the SOX is crucial since it establishes on the following primary objectives such as regular conduct inspections by the SEC, enhancing transparency, and making the whole company accountable. In addition, the law seeks to make external auditors accountable, which resulted in further revision of the law and the establishment of the Public Company Accounting Oversight Board (PCAOB). The basis or the main objective for the enactment of the legislation, was to re-establish shareholders’ trust and the dependability of financial reports and others, albeit vital, non-financial statistics revealed by public companies (Kecskés, 2017). After the law was passed, chief financial officers (CFOs), chief executive officers (CEOs), and autonomous external auditors contracted by various public groups to include some relevant particulars, which were previously overlooked, in the corporations’ quarterly SEC filings.
The particulars that were previously overlooked by auditors contracted and company executives include the obligation to disclose all deficiencies in Internal Controls over Financial Reporting (ICFR) and the operation or design of disclosure procedures that could have an impact on the financial statements (Coates & John, 2007). SOX certifies the efficiency of ICFR and includes the auditor’s confirmation to the efficiency of the public company’s ICFR. SOX also certifies the competence of disclosure procedures and controls and acts to disclose any critical internal control in the financial systems are important (Coates & John, 2007). SOX is crucial as it seeks to safeguard investors by ensuring that there are existing checks and balances for people working at the CFOs, CEOs and directions, practically the whole operational leadership team, and employees working in the accounting department. Additionally, it was considered as a useful tool that promotes lucidity in the financial and operating statistics, results of a company, including additional disclosures that are to be made available to the investors.
Circumstances That Led To the Creation of Sarbanes Oxley Act
After the mid-1990s and the experience of the booming economy, in what was known as the “new economy” in the US, the stock market revealed the major changes that would influence the economy. Stock averages experienced a rising curve as the rates showed signs of growth from the mid-1990s to early 2000 (Agrawal & Cooper, 2017). According to Coates and John (2007), new entrants in the market chose IPOs in the market and made huge profits, especially companies that leaned on the dot.com sectors. Changes in the culture of equity investing, booming of the economy and the rising popularity of information, communication and technology attracted millions of investors in the stock markets.
In the second financial quarter of 2000, the expected growth in the economy seemed to be delicate. Before the investors started to avoid the American stock exchange markets, stock prices went down as the IPO market lost its vigor. Upon the falling of the American market in 2000s, further exposures ensued; the Enron story in October 2001 and the various fraudulent activities, severe erosion in business ethics, and other misconducts (Agrawal & Cooper, 2017). Other companies that were involved in financial scandals include Adelphia, Tyco, and WorldCom, among others (Agrawal & Cooper, 2017). The scandals in such enterprises culminated in the loss of jobs, employee retirement fund benefits, and loss of investor’s money in billions of dollars. Other misconducts were also noted after the stock market failed, which included the issues of fair trade practices and integrity in the once highly praised IPO market.
Additionally, and in the grandest display of wrongdoings by public officers and greed, the plummeting of the market created further opportunities for deleterious developments. Before the market failed, when investors were enjoying the explosion of the market, corporate America became increasingly focused on short-term success, which was powered by the fixation with quarterly profits (Coates & John, 2007). In some instances, the stocks that were highly valued and available to those who are highly vested in the corporate world created the obsession. Market analysts were fixated on “hitting the numbers,” which was fueled by overwhelming conflicts of interests (Agrawal & Cooper, 2017). Prior to SOX coming into law, the market players were more concerned with gaining more each time, instead of allowing a healthy market that would guarantee long-term success and performance.
The SOX legislation was deemed necessary since most managers were convinced that the constant earning growth meant growth in the corporate marketplaces. Consequently, many managers in publicly traded companies adjusted financial figures to satisfy the expected outcomes in small and significant ways, which were all objectionable. To address the plummeting levels of investor trust, and the awareness that something was seriously wrong in the diverse market sectors of corporate America, Congress enacted, and the president signed the Sarbanes-Oxley Act into law (Agrawal & Cooper, 2017). At the signing event, the president made it...