subject: Sarbanes-oxley Act Combats Accounting Fraud [print this page] In the wake of the corporate scandals - like those at Enron, Tyco International and WorldCom - which ripped apart the financial interests of thousands of shareholders and retirement plan investors; lawmakers and professional bodies decided to tighten the grip on financial reporting norms.
The Sarbanes-Oxley Act is the response to these malicious accounting practices. It seeks to restore the public's confidence in corporate governance ethics and financial reporting guidelines.
If, in fact, the public's trust has truly been shattered it is an issue of concern - especially in light of assurances that sound accounting and auditing practices are being employed. The Sarbanes-Oxley legislation establishes new standards for all domestic publicly held company boards, their management and public accounting firms.
Some of the main provisions of the Act are:
A new agency, the Public Company Accounting Oversight Board, shall monitor the role of auditors of public companies. Henceforth; CEOs and CFOs shall certify that the financial reports are true and fair.
Stringent measures to establish greater auditor independence; including bans on certain types of assignments and prior certification by the company's Audit Committee of all other non-audit work. Listed companies are to have fully independent audit committees to review auditor-client interaction. Significantly longer jail sentences and heftier fines for corporate executives guilty of willful misstatements. Protection for employees providing information to OSHA within 90 days to claim reinstatement, compensatory damages, back pay, benefits and reasonable costs.
The professional regulatory bodies have also embarked on a thorough exercise of revamping auditing guidelines and generally accepted accounting practices. It is not as if the auditors colluded with the perpetrators, but insufficient mandates for making disclosures of certain types of transactions could have led to slippages despite the diligence and due care of the auditors. A famous judge once commented: "Auditors are like watchdogs; they are not bloodhounds".
The disclosure requirements mainly equip the auditors to report whether there have been shady or questionable transactions. Therefore, disclosures are an integral part of the financial statements. They provide additional information on transactions that could have significant bearing on the interpretation of the information contained in the statements. Disclosures also ensure that chief executives of corporate bodies apply GAAP when preparing financial statements.
Common forms of disclosures are:
Additional information on account balances in the financial statements, primarily with respect to transactions with top management or their relatives. Supplementary tables and schedules. Financial impact of certain decisions.
