subject: Impact Of Sarbanes-Oxley Act [print this page] Impact Of Sarbanes-Oxley Act Impact Of Sarbanes-Oxley Act
An analysis of the impact of Sarbanes-Oxley Act can best be understood if some background information is analyzed concerning its genesis and the causes that necessitated its drafting. The main architects of the legislation were Representative Michael Oxley and Senator Paul Sarbanes. The act became law in 2002 when it was signed by former president Bush who described it as a great act with far reaching reforms in American business practices. It introduced considerable changes to the regulation of corporate governance and financial practice by enhancing financial disclosures and corporate responsibility. The act would enhance the combat of corporate fraud and to this end; it established the Public Company Accounting Board (PCAOB) that would be responsible for setting and implementing deadlines in regard to the act requirement. The act, in short referred to as SOX is organized in 11 titles and analysts consider sections 302, 401, 404, 409, 802 and 906 to be the most crucial as far as compliance is concerned (Larry, & Miller, 2009, p 1). The act is not a set of practices to be observed by businesses but rather defines the records that businesses should store, for how long and the deadlines for complying with established rules. It is administered by SEC (Securities and Exchange Commission, 2009, p 1) which is responsible for setting and establishing compliance and regulations requirements. The act requires that all business records comprising of both electronic messages and records should be stored for a period not less than five years failure to which one is liable to imprisonment, fines or both (Gingrich & Kralik, 2008, p 1). The creation of the act was precipitated by financial scandals that rocked major companies that were trading in equities which led shareholders to lose their investments despite reassurances by the company's financial auditors assuring them of the stability of such companies. The notable financial crisis that occurred prior to its legislation was that of Enron, Xerox and WorldCom (Shakespeare, Journal of Business & Technology Law: 333). The main similarity between these scandals is that the company's management colluded with their respective auditors to present shareholders with figures that represented huge profits without actually owning up to the billions of debts the companies had accumulated. The scandals hence occurred as a result of professional misconduct by both management and the auditors who are normally supposed to be the public watchdogs that ascertain the truth of the figures presented by companies' statements of accounts (Securities and Exchange Commission, 2009, p 1). The act was created out of recognition that accountants easily shifted their capacities as watchdog auditors and turned to be smart architects of frauds and clever deals in their positions as CEO's and CFO's. The 1995 statement of Audit standards established that the responsibility of preparing financial statements of a given entity lies in the domain of the directors of that entity. The role of the professional auditors is then supposed to be the ascertaining of whether the respective directors followed the necessary Accounting and Auditing standards required by the law. The auditors are relied upon by the shareholders in providing reasonable assurance that the financial statements presented during financial meetings are true and represent a substantially fair position of the company. It is hence recognized here that the role played by these auditors are crucial in determining the possibility of investors to invest in such companies. If it happens that the laws governing such practices are weak, and if it occurs that management and auditors can collude to present wrong information to the investors, then the consequences would be that the true identity of such corporations would be recognized when its too late, leading to the irredeemable loss of investment as was the case in these corporations. The act is hence seen as a shield for investors to ensure that they are protected from being lied to by corporation management. In the case of Enron, the auditing group, Andersen LLP defended its accusation of professional misconduct claiming that the information they certified to the investors was only based on the information they were provided by the company. This was to justify themselves since it later became evident that thousands of important documents pages were shredded hence denying the auditors the complete picture of the company's position. It is to be noted that the financial scandals by these companies led to their bankruptcy, and at their fall, sunk a lot of investors' money.
The goals of SOX were far reaching and it may not be easy to pinpoint all the accomplishments achieved by this legislation. One of the most crucial goals targeted by this act was to restore investor confidence in the capital markets as well establish integrity within the markets (Shakespeare, Journal of Business & Technology Law: 335). The reform contained in the act addressed almost every aspect of the country's capital markets by addressing the roles of all reporting companies, foreign and domestic as well as stipulating conduct for their directors and officers. According to Donaldson, (2005) who was then the chairman of the Securities and exchange committee, SOX objectives could be grouped into 5 major themes as follows:
i.To restore and strengthen public confidence in auditing
ii.To improve and enhance executive responsibility making them more responsible and prudent.
iii.To strengthen the enforcement of federal security laws
iv. To improve financial reporting and disclosure
v. To improve the performance of watchdog institutions such as research analysts, accounting firms and attorneys (Securities and Exchange Commission, 2009, p 1).
