Sarbanes Oxley - Research Paper Example

sarbanes oxley act The paper sheds light on the Sarbanes Oxley Act which laid down the foundation and set new standards of financial reporting for the public as well as the listed companies along with the auditors of the public and listed companies to ensure the security of the interests of shareholders as well as other stakeholders. introduction After some massive corporate scandals such as Enron, WorldCom and Tyco International etc, questions were raised on the credibility of the financial reporting customs and the quality of the audit along with the reliance which is placed on the audit.

This called for the guard of the interest of the shareholders as well as the rebuilding of the trust of the investors where they can have faith in the audit as well as the financial reporting practices that reporting standards will highlight, at the right point of time, regarding any event which may affect their interest. Certain actions were also required which protect the interest of the investors through enhancing the truthfulness and consistency of the financial reporting and the disclosures made for the purposes of financial reporting as per the applicable standards.

Hence, a bill was enacted in the end of July 2002 in order to set improved standards as guidance and benchmark for every public company of U.S., its board of directors, administration and especially the public auditing firms. This bill is remembered by the names of the sponsors of the bill i.e. Paul Sarbanes and Michael Oxley who were the Senator and Representative respectively. The bill covers 11 wide areas of the financial reporting as well as audit such as the independence of the auditor, corporate social responsibility, disclosure requirements, fraud accountability, tax returns and penalty regarding the corporate frauds etc.

Since the enactment of the bill, numerous questions have been raised on the extent to which the bill has proved to be beneficial to the investors as well as the shareholders and the extent to which it has provide the guiding principle for the companies to improve and enhance the truthfulness and reliance of the reporting. Some analysts consider the act as a very beneficial development to curb the events of fraud while some consider the fact that the complexities created by the act have overshadowed its advantages.

advantages of the sarbanes oxley act Some of the advantages that have accrued to the shareholders and the investors as well as the regulatory bodies to enhance the credibility of reporting as well as the audit are explained in detail below. special attentation towards internal control One of the foremost benefits which have flown to the entities as well as the stakeholders of the company is that the law requires the external auditor of the company as well as the management to account for the sufficiency of the internal controls of the company with regards to financial reporting.

(Wagner, 2006) The act requires the company to produce a report and to confirm its responsibility of establishing internal control for the purpose of financial reporting, which enhances the credibility of the management as well as the reporting. (Legal Guide) Responsibility of financial reporting The act emphasizes on the top management of the company to claim the responsibility and ownership of the financial statements. Pursuant to this, it was seen that the management took greater interest in the preparation of financial statements as well as other reporting responsibilities.

enhanced auditor independence The act called for enhanced auditor independence as prior to the act the auditors used to ignore or conceal misstatements in order to establish client relationship and to acquire business of the client by providing non-audit or consultancy services to the client. The act strictly banned the auditors from entering into agreements which were undertaken to provide well-paid consultancy or other non-audit services. This further improved the auditor objectivity and the independence of the auditors.

guard of Information Technology based transactions The clauses of the act do not merely influence the monetary area of companies, it also involves the Informational Technology sector whose has to store the electronic records of the entity and execute transactions through electronic devices. The act lays emphasis on keeping the electronic records of the entity for a period of 5 years or more which includes the business transaction record, communication record, data processing record and any other related electronic data.

(Spurzem, 2006) This ensures the scrutiny of monetary as well as the electronic data for the purpose of audit and to determine any event of fraud within the entity. disadvantages of the sarbanes oxley act Apart from the advantages that flew to all the stakeholders of the company for enhanced reliance, there was also some criticism on the act which curbed the advantages. Some of those disadvantages are following. increased the cost of reporting The act called for the establishment of some new departments such as the internal control department and also called for additional reporting responsibilities which required the companies to either hire experienced personnel or outsource in persuasion of the clauses.

These additional costs have proven to be fairly heavy for the companies and the act has come under immense criticism in respect of these costs. flight of business to other countries Some people have argued on the fact that due to the stringent regulations of the act, it has become difficult for some of the companies to cope up with the requirement of the act and to comply with it. Hence, these regulations have proven to be damaging, particularly to small companies and firms, who are getting themselves delisted from the US stock exchanges and getting listed on stock exchanges across border.

harsh penalties The analysts have also blamed the law for enforcing penalties which have been very harsh in their nature. Some penalties such as the financial statements not signed by the appropriate authority etc were deemed harsh by the analysts and it was seen that companies, in order to escape from these penalties, took flight to other countries where they assumed lesser compliances. (Vitez) conclusion Since the event of major corporate frauds in the United States and other countries, many laws and regulations have been made in order to regain the confidence of the investors and to make sure that such incidents do not take place again.

Sarbanes-Oxley Act is one of those laws which came up in order to reestablish the faith of the investor and to lay down the foundation of improved and secure corporate reporting which doesn’t only prevent frauds and misstatements but also lays down the guiding principles for governing the audit of financial statements. The act has been quite able to rebuild the confidence of the investor and has also enhanced the reliance of the user of the financial statement but some of the aspects, such as the heavy costs of compliance and the restrictions placed over companies and auditors have overshadowed the advantages of the act.

Works Cited Legal Guide. (n.d.). Retrieved November 28, 2011, from http://www.toplegalguide.com/sarlaw_advantages.htm Spurzem, B. (2006). Retrieved November 26, 2011, from http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act Vitez, O. (n.d.). Disadvantages of Sarbanes Oxley. Retrieved November 28, 2011, from http://www.ehow.com/about_5494421_disadvantages-sarbanes-oxley.html Wagner, S. (2006). Unexpected Benefits of Sarbanes-Oxley. Harvard Business Review .