Explorations of Specific Sarbanes Oxley Sections

Abstract

The Sarbanes-Oxley Act of 2002 has been one of the revolutionary legal frame works in US and all public companies regardless of their size have to comply with the provisions of the act. This legislation of the federal law of the United States came up with changes in corporate management in public companies to avoid cases of fraud and scandals in the management of public organizations. The act also seeks to introduce tighter control systems within organizations and improve the levels of compliance. The Sarbanes-Oxley section 302 is one of the parts that have been considered important when it comes to matters of compliance. This provision has particularly stressed on the role of financial reporting and auditing in organizations.

Discussion:

Well-organized companies have financial policies that control them. Despite the proper mechanisms for financial controls and accountability in the organizations, most companies have ended up being victims of non-compliance to the policies leading to huge losses and numerous court cases against the directors and managers of the companies. Many stakeholders such as investors and the members of the public have therefore lost confidence in organizations owing to numerous scandals experienced mostly in US firms in the past few years. The legislation is therefore a very vital tool when it comes to the restoration of confidence of the public in capital markets within the nation. The act clearly explains the roles of the corporate board and the penalties for those who went against the regulations stipulated by this legislation.

This section of the act has brought about accountability and transparency resulting to trust of organizations and companies by the public. The executives are mandated to take responsibility for the performance of the company by maintaining accuracy when giving financial reports. This is because shortcomings in the internal control of the organization and fraud cases concerning employees are properly covered in the act. These particular officers are required to ensure that the financial reports do not contain any information that is false or unqualified. The external auditor of a company is expected to give opinions annually on whether the information given by the executive officers and the chief financial officers of the companies are reliable. The limit of the behaviors of corporate officers the benefits for compliance and the penalties given to the non-complying companies are therefore well laid out within this act.

These regulations are effective in pointing out weaknesses in financial reporting for instance in fraud related cases, the management must address these issues in detail to avoid unlawful acquisition of money by the employees. Any deliberate destruction done to audit records such as correspondences and paper work, which are still in use, may end up in a fine or a ten-year jail sentence. This will greatly help in preventing the use and acquisition of assets from the company without any authorization. The use of information technology within a company’s setting immensely affect the way the internal control carried out because it directly involved in recording, authorization and processing of financial transactions.

The implementation of section 302 of The Sarbanes-Oxley Act of 2002 has had a great impact in the day-to-day running of organizations. For example, the IT departments are mandated to maintain high levels of technology, which can help them, obtain new methods of selecting, installing and even maintaining complicated and highly rated business functions. This can transform the IT department into an important resource in the corporate world. Whistle Blowers, who are protected by this act, have come up to uncover misconduct by employees involved in financial fraud and this has helped in containing major scandals. One case of fraud at value line involving $24 million, which had gone on for almost 20 years, was uncovered in November 2009 thanks to Sarbanes-Oxley. It involved a conspiracy by the top-level management at the company to defraud the shareholders. The other major scandal was the Enron case, which involved a conspiracy between the management of Enron and the auditors who were not able to detect the high-risk business activities that the company had engaged in. At the end, shareholders lost more than $11 billion when the firm filed for bankruptcy. This was a major audit failure in the US as the external auditors provided unqualified reports about the company.

WorldCom, which was the second largest telephone company in the US, also had to deal with a major financial scandal that forced the company to file for bankruptcy protection. The case of WorldCom was a perfect accounting fraud where the CEO of the company enriched himself at the expenses of the shareholders. The firm was able to create an impression of good performance, which led to high share prices in the market, and hence the major shareholder who was Ebbers made huge gains from this situation only for the company to file for bankruptcy in early 2000.

Corporate governance has improved since companies are no longer in a capacity to manipulate information concerning inventories and sales due to the systems of reporting that have been put in place. A standard system of data entry in organizations as required by the act has encouraged transparency and has forced the employees to be more accountable for their actions when it comes to the company’s cash and property management.

The confidence of investors in financial reporting has improved a great deal and this was the main aim of the legislation. Improvements in management, auditing, and the general functions of the board in financial control cannot be ignored, Michael (2005). Companies have given financial restatements in companies has declined since they have considered adhering to the instructions given in the act. Many scandals involving accounting in companies in the United States have occurred like Tyco international, WorldCom among others that could have been prevented with full application of the provisions within the act.

By involving auditors in making consultations with the organizations, the disagreements within companies declined. This has speeded up reporting, improved accountability and the auditors have become more independent. The signing officers are therefore to evaluate the report and analyze its effectiveness on the company’s internal controls within a period of 90 days before they give their conclusion. The act insisted on the fact that shareholders also owned the companies and that the managers were only to work on their behalf in utilizing resources in the business. Sarbanes Oxley has truly assisted in the restoration of trust in United States markets due to its effort to encourage independent auditing, accountability and the whole process of financial reporting (Theodore, 2008).

Companies have centralized and made their financial reports automatic making their systems more efficient. The Sarbanes Oxley Act’s also affect non-US organizations though differences emerge in companies developed and developing countries. It’s however worth noting that countries that applies the SOX act in the operations are likely to get a favorable ratings in US and this boosts trade and investments with those companies. Companies from developed states have higher costs because transparency is considered important in their country as well. Besides this, better rating of credit may eventually result in listing on other stock exchanges outside the country.

Borrowing costs for companies that have implemented the recommendations of this act are much lower because their financial reports are accurate. Those with appropriate internal controls have also noticed an increase in the prices of their shares as opposed to those who have ignored the provisions of the act.

The Sarbanes Oxley Act does not affect most private firms in the United States but those among them that comply with the recommendations of the act are more transparent .Recent analysis done in these firms has shown increased profits and public trust and confidence. Most small firms experience a reduction in their stock value. This makes their earnings lower and consequently brings down their share prices. The changes in the cost of coming up with a public company in United States were greatly affected by these regulations. Private companies benefit from the fact that they do not incur extra costs like fees for external auditors, officers and board of directors insurance and legal costs. The Sarbanes Oxley act costs of compliance are high it has since caused changes in the market value from time to time. Private companies are likely to choose policies that are less expensive and this is likely to affect their performance, as total compliance with the act is the only way out in ensuring confidence and performance of the companies.

Conclusion

The provisions of the Sarbanes Oxley act have therefore changed auditing and internal control environment in the public companies in the US and the gains are being replicated in other developed countries. This act has therefore managed to avert major financial scandals that were witnessed in the early 2000 in major firms. It is therefore important that firms take internal controls seriously and adopt a collective approach to the process of auditing to protect the shareholder wealth.

References

Theodore, N. P. (2008). The Sarbanes-Oxley Act: implementation, Significance, and

Impact .Nova Publishers.

Michael, F. H. (2005). The Sarbanes-Oxley Act: overview and implementation

Procedures .Elsevier.