Adoption of Sarbanes-Oxley Act of 2002 as an Important Piece of Legislation - Term Paper Example

In the last section the report evaluates the costs and benefits of the changes ushered in by the Sarbanes-Oxley act of 2002. The Sarbanes-Oxley Act of 2002 was drafted by the senator Paul Sarbanes and representative Michael Oxley (SOX-online.com, 2006: Online). The primary objective of the Sarbanes-Oxley Act was to protect and safeguard the interests of the investors by assuring transparency, accuracy and reliability of the financial disclosures made by the corporations. It is a mandatory Act and all the large and small US organizations are required to abide by and follow the provisions and requirements of the Sarbanes-Oxley Act.

This Act came into force in the year 2002 and brought in sweeping changes into the area of financial disclosure and corporate governance (Sarbanes-Oxley Act, 2006: Online). The Enhanced Standards Required by Sarbanes-Oxley Act The Sarbanes-Oxley Act not only established new standards of financial accounting and corporate governance but also made provisions for the apt statutory penalties to be imposed in case of any wrongdoing not allowed for and sanctioned by this act. The Act made the corporate accounting system more transparent and responsible by formalizing and assuring the interaction between corporate auditors and corporate boards and executives .

This totally obliterated the possibility of an excuse on the part of top executives in corporations regarding being unaware of the organizational accounting systems and the accompanying disclosures made by the auditors. To put it simply, the Sarbanes-Oxley Act made the top executives like CEOs and CFOs directly responsible for corporate accounting and subsequently culpable in case of any wrongdoing or misreporting in the organization’s financial reporting (US Securities and Exchange Commission 2010: Online).

This act clearly specifies the responsibilities associated with the organizational financial accounting. Sarbanes-Oxley Act has also introduced a mechanism of internal controls and monitoring to assure the credibility of financial reporting (US Securities and Exchange Commission, 2010: Online). According to this act, the companies are required to tag an internal control report with every financial report (US Securities and Exchange Commission, 2010: Online). The yearly financial reports are also required to report on the reliability and effectiveness of the internal controls (US Securities and Exchange Commission, 2010: Online).

Further, the concerned auditing firms are required to stand behind these reports (US Securities and Exchange Commission, 2010: Online). This places the onus on the auditing firms to review the associated procedures, controls and policies, besides conducting the regular financial audit (US Securities and Exchange Commission, 2010: Online). In case a company fails to abide by any requirement or section of the Sarbanes-Oxley Act, the act allows for a range of penalties for the culprit organization and executives, which include fines amounting to