What is the Sarbanes-Oxley Act - Report Example

Potential issues regarding a ` Clean Audit` opinion that has been issued, when problems existed The accounting and auditing profession should be one that safeguards the interest of investors and other users of financial statements. This is so because Investor confidence is fundamental to the successful operation of the world’s financial markets. When making decisions about capital allocation, the investors need to know that the financial information provided to them is credible and reliable. The quality of audit and audit opinion on financial reports are crucial to achieving that. Independent auditors play a vital role in enhancing the reliability of financial information by attesting to the veracity of the financial reports preparing the institutions concerned. Audit is one of the vital functions that ensure that the users of financial statements can rely on them. The challenge in the profession is to regularly reassess whether the standards of financial statement and reports are appropriately set to provide the level of confidence that the investors and other stake holders in the society expect. Corporate collapses in the United States like the cases of Enron, Tyco International, and WorldCom, etc have caused a decline in the confidence levels among the investors and users of the financial statements. Regulators and the watchdogs of financial reporting the world over agree that independent external auditors play a key role in formulating credible financial reports. Auditing theory states that when an auditor is confronted with a situation that indicates that there may be widespread problems with the reliability of a firm’s representation during an audit, they must increase the scope of the audit work to compensate for the deficiencies in the controls. In response to a number of major corporate and accounting scandals including those of Enron, Tyco International, Peregrine Systems and WorldCom ,the US Government enacted the Sarbanes- Oxley Act of 2002, which is a United States Federal Law. These corporate scandals, also have contributed to create other wide-ranging effects. Among these were layoffs of employees on a large scale which in turn caused both individual suffering as well as speeded up the downturn in the performance of the US economy. The scandals also permeated continued weakness in the securities markets by reducing the value of the wealth of many people and, thus, potentially putting more strain on the spending on service sector by government. The popular press and other influential organs of organized political activity clamoured? for governmental "action" of some type. As a result, the federal government acted, and it acted in a big way. By passing the Sarbanes-Oxley Act, the federal government has changed the business landscape in a significant manner. (Backer, 2002). These scandals further resulted in the decline of public trust in accounting and reporting Practices. The legislation is wide-ranging and establishes new or enhanced standards for all US Public Company Boards as well as Management and Public Accounting Firms. It requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. The Act establishes a new quasi-public agency the Public Company Accounting Oversight Board which is charged with overseeing, regulating, inspecting and disciplining accounting the firms in their roles as auditors of public companies. It also covers issues such as auditor independence, corporate governance, and internal control assessment and enhanced finance disclosures. The main aim of enacting the SOX Act was to reduce audit risk a part from seeing to increase the reliability of financial disclosures used by the stakeholders. Here are the major provisions of the act can be tabulated as under: CEOs and CFOs are held responsible for their companies’ financial reports Executive officers and directors may not solicit or accept loans from their companies Mandatory disclosure of CEO and CFO compensation and profits Mandatory internal audits and review and certification of those audits by outside auditors Insider trades are reported more quickly Insider trades are prohibited during pension-fund blackout periods Criminal and civil penalties for securities violations Longer jail sentences and larger fines for executives who intentionally misstate financial information Audit firms may no longer provide actuarial, legal, or consulting services to firms they audit Publicly traded companies must establish internal financial controls and have those controls audited annually This last provision is of concern primarily for large companies, and is commonly referred to as SOX 404 compliance. It requires publicly traded companies to institute comprehensive internal controls on their finances, as well as have their policies regularly reviewed by outside firms. While this might not affect the small business, it is having a significant impact on big ones: Companies with revenues of more than $5 billion are spending an average of $4.3 million just to achieve SOX 404 compliance. (what is the Sarbanes-oxley Act 2002). So unless there are plans to make a small company public very soon, Sarbanes-Oxley probably wont have any repercussions for the business. However, so far as it relates to investors them SOX might allow to sleep a little easier. The potential issues arising out of a Clean Audit opinion that has been issued, when problems existed in the financials of the corporate entity are mainly: Corporate bankruptcies like in the case of Enron, WorldCom etc., Share holder values get depleted Credit rating of the company by the rating agencies will undergo substantial changes Managers achieve higher reported income so as to qualify for bonuses, or the audit firm being reappointed ,resigning or being replaced by the management Integrity and competence of the CFO/Controllers team which prepares the audit statement becomes questionable Decline of public trust in accounting and reporting practices Criminal legal actions against the auditor firm may arise resulting in severe strictures against the firm concerned Will be exposed to harsh public scrutiny leading to potential devastating effect on the organization Quality of audit process and the tools used by the external auditors gets seriously affected The integrity, skill and knowledge of the audit partner and audit team will need to reassess for future audit functions Can have devastating impacts on careers ,investors and future of the company Lawyers are also affected. Companies caught up in the financial scandals of their officers and directors have at times attempted to cast the net of liability widely enough to catch corporate general counsel. This situation would not arise if the external auditor had pin pointed the financial deficiencies in his report The best practices that can be adopted are hiring a second accounting or business advisory firm to provide non audit services, including internal control evaluation and internal audit co-sourcing and outsourcing. Audit committees should also consider engaging independent attorneys and accountants to assist them in understanding and executing their fiduciary responsibilities. There are many hidden benefits in Sarbanes Oxley. Many CEOs find that the new requirements provide them with useful tools for running their companies more confidently. Internal control helps managers; leadership teams and business operate more effectively and help to avoid problems such as overspending, operational failures, fraud and litigation. (Nusbaum, 2003). Works cited Backer, L.C. (2002). The Sarbanes-oxley Act: federalizing norms for officer , lawyer and accountant behavior. Scandals, certification, corporate governance and business failures. United states. Retrieved August 30, 2007, from http://www.allbusiness.com/business-planning/business-structures-incorporation/1037352-1.html What is the Sarbanes-oxley Act. (2002). Retrieved August 30, 2007, from http://www.allbusiness.com/government/business-regulations/11410-1.html Nusbaum, Edward. (2003). The hidden benefit of Sarbanes-oxley. Impact of new law on companies and chief executives. Retrieved August 30, 2007, from http://findarticles.com/p/articles/mi_m4070/is_2003_May/ai_101516993 Read More