Sarbanes-Oxley Act of 2002 - Essay Example

Sarbanes- Oxley Act The Sarbanes-Oxley act which came into effect in 2002 had the core intention of preventing, protecting and deterring future corporate fraud in order to increase shareholders confidence in their investments in public companies. The act imposed duties and costs on listed companies and accounting firms in terms of meeting the stringent regulations and guidelines believed to be necessary in protecting investors’ wealth.Sox changed the manner in which companies are run in several ways.

First, the act let to greater requirement to have robust internal control of financial reporting, independence amongst the board of directors and increased expertise requirement (Pain & Karmakar, 2007). Public companies are demanded to set internal control structures to guarantee the quality and accuracy of financial reports in order to enable investors make informed decisions on which investments decisions they should undertake. Public companies are therefore needed to have independent board of directors to provide oversight and develop and assess internal controls systems.

Secondly, the act has stipulated the standards and manner in which auditors should carry their mandate by ensuring that their independence is not impaired and that members of the audit engagements do not have conflict of interests (Pain & Karmakar, 2007). It further restricted audit firms from providing non audit services that are likely to interfere with their objectivity.In addition, the act has placed the responsibility of ensuring accurate and complete financial reports on senior management.

The act specifies the responsibility of senior management on the validity and accuracy of the financial reports and outlines the interaction between board audit committees and the external auditors. Moreover, Sarbanes Oxley highlights the enhanced financial disclosure requirements for the financial results (Pain & Karmakar, 2007). Public companies are required to disclose off balance sheet transactions and beef their reporting. Significant changes in the assumptions and conditions should further be disclosed.

Likewise, the act mandates security analysts, directors and auditors to declare their conflict of interest before accepting to provide financial services to public companies. Equally stipulated in the act are the penalties preferred for destruction, manipulation and alteration of financial records with an objective of misleading the public in order to make financial gains. It recommends sentencing and incorporates failure to certify financial reports as an offence punishable by law. Other important elements of the act includes requirement by company chief officer to append signature on the company tax returns, protection of whistle blowers and also gives mandate to SEC to censure security professionals, practicing brokers and advisors whenever they fail to practice within the set conditions.

In conclusion, the Sarbanes Oxley act is purely enacted to protect investors when making investments decisions by demanding additional disclosures and enforcing stronger penalties for engaging in corporate fraud.ReferencePain, A. K., & Karmakar, N. (2007). Corporate governance and Sarbanes Oxley Act: an Introduction. Hyderabad, India: Ifai University Press.