Adoption of the Sarbanes-Oxley Act of 2002 - Assignment Example

Adoption of the Sarbanes-Oxley Act of 2002 Legislation is considered to be of a wide range as it develops standards for all the US public accountingfirms management, and the public company boards. Information technology is not regulated directly by SOX; however, the law regulates the IT backbone which is of the financial processes. According to section 302, the CFO, CEO and an attesting public accounting firm have to certify the accuracy of financial statements and attest that the statements given should fairly present operations and financial condition of issuer; they also have to retain the material information that is used to generate reports and should be made available to the public whenever needed. The IT normally gets affected as it is primarily the IT systems that have to produce the periodic report and also control the e-mail which is the most used method of communication. The IT systems are very delicate and must at all-time remains reliable and secure (Audit-Information Systems, 2008). Section 404 is considered to be most pertinent section as it concentrates on the obligation of corporate management to be fully liable to the honesty of data associated with their financials. The section states that the management panel has to launch and be able to maintain proper internal controls over their fiscal reporting systems so as to be safe against any unauthorized and improper use of financial reports/information. The act normally requires companies to undergo risk assessment that is related to their financial systems and that they should produce an internal control report yearly that basically sketches out the efficiency of internal control structure in place. Companies are also needed to keep well detailed records that are related to their financial systems (Audit-Information Systems, 2008). Why the New Enhanced Standards Are Necessary The Sarbanes-Oxley Act developed new standards for company accountability and new penalties for the acts of wrongdoing. The Act has changed how the executives and corporate boards are supposed to interact with each other and with the corporate auditors. The Act came into force after the wake of a number of corporate scandals. The scandals had one thing in common – a skewed report of the selected financial transactions. For example, companies such as WorldCom, Enron, and Tyco misrepresented or covered up a number of questionable transactions that resulted into enormous losses to the stakeholders and investor confidence crisis. These scandals necessitated the enactment of the Sarbanes-Oxley Act (it contained the new enhanced standards to mitigate the scandals) (SOX-online.com, 2006). Benefits and Costs of the SOX The new provisions in the Act emphasize on the importance of internal control; internal control is very beneficial to the corporate organization. Internal control is defined as the processes that are designed to offer reasonable assurance in regard to the financial report reliability. The golden rule for internal control is that the benefits are supposed to outweigh the costs. The audit fees are expected to rise up to 38 percent in the first year of compliance with the Act’s section 404; this is according to a survey conducted on public companies by the Financial Executives International (FEI) on 2004. The survey also indicates that the total cost of section 404 first year compliance may exceed 4.6 million United States dollars for each of the biggest companies in United States; companies with revenues that surpass 5 billion U.S. dollars revenue. Smaller and medium-sized companies will also incur costs amounting to close to 2 million U.S. dollars. The direct costs to be incurred are accounting and audit fee. PricewaterhouseCoopers survey rated the following as costly in compliance with section 404 of the Act; (a) documentation (74 percent of the respondents), (b) legal requirements (72 percent), (c) detailed policy development (65 percent), (d) self-assessment (62 percent), (e) attest certifications and requirements (59 percent), (f) staff training (56 percent), and (g) technology (41 percent). Some of the indirect costs include going public, productivity and decision making, and the independent director (D’Aquila, 2004). Reactions of Companies and Companies’ Executives to the SOX and Its Requirements Cost is the biggest complaint from the companies because it very costly to implement SOX and in particular section 404. The regulators estimated the cost to be in thousands but the real cost as found by the companies ran into millions. The larger companies have been able to cater for the cost but the smaller companies have found it very difficult. This has led to a number of startups to trade on the foreign markets such as London Stock Exchange in order to avoid SOX compliance (Bramble, 2011). SOX have changed the compensation package structure for the corporate executives. Many of these executives have resulted in using other formats for their compensation packages other than taking stock options and this has affected many companies. Companies store their records and information on the mainframe but compliance with SOX has encouraged the companies to store everything to avert the dumping of important information. SOX has created penalty for CFOs and CEOs for data errors and this has forced majority of the companies to adopt an automated mainframe updating system; these systems are expensive (Bramble, 2011). Changes in Accounting Practices Due To the Adoption of the Act Reforms that are associated with the Act are considered to be extremely complementary to objectives that are adapted to the standard settings. Objectives oriented accounting standards auditors and hold preparers lead to a high level of responsibility in order to fulfill the clearly-defined and substantive accounting objectives; the Act offers for a high level of accountability and monitoring that makes sure that most of the companies are motivated to do so (U.S. Securities and Exchange Commission, 2003). Certification of the management can be more meaningful when they are combined with the objectives oriented accounting standards because the goal of the fair presentation of the results will be based on the objectives on which the standards are built on (U.S. Securities and Exchange Commission, 2003). References Audit-Information Systems. (2008). Sarbanes-Oxley Act. Retrieved from http://www.audit-is.com/legislation/sox.htm Bramble, L. (2011). Problems with Sarbanes-Oxley. Retrieved from http://www.ehow.com/info_7816905_problems-sarbanesoxley.html D’Aquila, J. M. (2004). Tallying the cost of the Sarbanes-Oxley Act. Retrieved from http://www.nysscpa.org/cpajournal/2004/1104/perspectives/p6.htm SOX-online.com. (2006). Sarbanes-Oxley essential information. Retrieved from http://www.sox-online.com/basics.html U.S. Securities and Exchange Commission. (2003). Study pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the adoption by the United States financial reporting system of a principle-based accounting system. Retrieved from http://www.sec.gov/news/studies/principlesbasedstand.htm Read More