The Terrorists Deliberate Attack Weaken the Economy - Case Study Example

The Sarbanes-Oxley Act Of 2002 BACKGROUND OF SARBANES-OXLEY ACT The year 2001 onwards proved to be one of the most difficult and trying years in thehistory of the United States of America. Prior to the September 11 World Trade Center bombing, American economy has slowly been moving downhill. A controversial anomaly has shaken the public’s trust, and for a time period, people were afraid to put their money in the market. What has caused this downhill slip aside from the terrorist’s deliberate attack weaken the economy? Enron Corporation is in Energy commerce, involved in electric utilities and power gas trading. Based in Houston, Texas Enron has moved from its modest position to be the tagged as the 7th largest company in the United States and was expected to climb higher and stand out in the power and electric industries. In 2001, the company has 21,000 employees, believed to be in its peak operations. But there was no power shortage in California, hungry to profit more; in a tapped conversation, investors were discovered to have called the plant managers, asking them to shut down the power plants for ‘repairs’ even if there were no technical problems or such. With this ‘technical problems’ prices of electricity rose up to nine times. Enron was a blue chip stock, sold at 90 dollars per share; conniving with its accounting firm, the Arthur Andersen, it has carried out illegal accounting practices since mid 1990’s. It took the plunge when it was found out that its revenues were from trading with special purpose entities. It has at the same time anomalously not declared its losses and debts and from the 90 dollar per share, it has slipped down a 50 centavo per share in a matter of months after the scandal was made public. What made it more devastating was that the same modus was used by other companies such as the MCI-World com, Global Crossings and Tyco among others. The accounting firm that figured in the Enron scandal has handled some of the financial reports of these erring companies. From this economic mess, people feared to invest their money in the market. The government was expected to do something drastic. To make measures to combat the public’s fear to do business with the market. Thus Congressman Paul Sabanes from Maryland, former senator and the longest serving Congressman of Maryland with Michael Oxley from the 4th district of Ohio sat down and authored a bill to respond the problem. They designed a bill that will implement stricter policies for public companies to follow, professional and ethical guidelines for certified public accountants, accounting firms and owners to follow. After a thorough deliberation and long legislative procedures President George W. Bush signed the act on July 30, 2002. Aptly titled “ the Public Company Accounting Reform and Investor Protection Act of 2002” or the “Sarbanes-Oxley Act of 2002”. WHAT IS SARBANES-OXLEY ACT OF 2002? The Sarbanes-Oxley Act of 2002 is a law designed “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law and for other purposes (http://www.aldodgekker.com/services/SarbanesOxleyFacts.html).” The major provisions of the S-Ox are: CREATION OF PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD. The PCAOB is a five-member committee appointed by the Securities and Exchange Commission. The duties and responsibilities of the board are: to register accounting firms that are involved or making business with public companies; create an independent criterion for auditing, professional and ethical behaviors of its members; to reinforce compliance of its members; investigate, probe and inspect members regularly. MANDATORY REGISTRATION. Mandatory registration for all Certified Public Accountants and Accounting firms that transacts/ does business with public companies. SEVEN YEAR RECORD RETENTION REQUIREMENT. For public Accountants to come up to a conclusion of the financial standing of the company, it has to be drawn from the last seven years performance. COOPERATION among members. ANNUAL INSPECTIONS for compliance purposes. INVESTIGATIONS. The board is to look into “any act, omission, or practices by a registered firm or an individual associated with a registered firm for any possible violation of the act, the board rules, professional standards or provisions of the securities law relating to the preparation of the issuance of the audit report (http://www.nysscpa.org/Oxleyact2002.htm).” FUNDING. The law provides the autonomous funding of the Financial Accounting Standard Board (FASB) to function properly. This funding is recognized by the American Institute of Certified Public Accountant. SOURCE. The source of the budget of the PCAOB and the FASB shall be drawn from the “annual accounting support fees”. The amount is determined by dividing the average monthly equity for the preceding fiscal year by the average monthly equity of that year. WHO ARE AFFECTED BY THE ENACTMENT OF THE SOx? Certified Public Accountant. They have to comply to the membership requirements and procedures. Certified Public Accounting Firms. The firms will have to comply with the requirements and stern membership provisions. Public Companies are expected to be more transparent in their financial transactions and are open to scrutinizes and investigations. Employees of Publicly trading companies. Added task to comply with the provisions of the act. Share Holders of the company are now liable for the performance of their company Owner of the company. Rather than the invisible hand, company owners are more open to law suits and professional liability. Rank and file employees of the company DISADVANTAGES OF THE SOx The high cost of compliance is the major disadvantage of the law. “According to financial Executives International, the publicly traded companies spend an average of 4.36 Million dollars annually to comply with the SOx (Edison,2006).” This problem has borne many more issues such as bias for small private owned companies to go public. The small companies can not afford to comply with the said amount annually and so they opt to stay private. It has also in a way turned the foreign investors thinking twice before investing the America because the law has complex procedures. In the end, the high cost of compliance will be passed on to the market. ADVANTAGES OF THE SOx - In the long run, people will benefit from the SOx. The positive impact of the bill will bring in more investors. -The high cost of compliance will ensure the accuracy and reliability of financial reports. -The owner and share holders of the company is now at a certain level liable for its operation, and when a scam or scandal happens, there is someone that will take the fall. ---The provisions of the act have added protection to the ‘whistleblower’ and thus encourage more transparency and audacity to come out in the open. CONCLUSION The Sarbanes-Oxley Act at first came out as a harsh “punishment” for public companies. The procedure was long and tedious. The fees were steep. Others call it an overkill. But as the years gone by, investors and the public has realized that it is indeed working. Now companies are careful along with their accounting firm and owners, they are more aware of their responsibility to the investing public. This is not the first time that a country has put on harsh laws in order to protect its investors; similar bills and legislations were done in this line: Bill 198 in Ontario Canada; J-Sox in Japan; CLERP9 in Australia; LSF in France, King Report in South Africa. This only shows that fraud and deceit is not monopolized by big American trading companies. And therefore, traders should not take this as a personal assault. What happened to Enron Corporation was an eye opener. Not all advancement is good; that there should be a certain check and balance to make certain that we actually earn what we profit. REFERECES: Edison,Andrew. United States: Explring the Impact of Sarbanes-Oxley 2006. Mondoq business briefing.LexizNexis Academic Document Accessed Novermber 25,2008. (http://www.nysscpa.org/Oxleyact2002.htm).” (http://www.aldidgekker.com/services/SarbanesOxleyFacts.html).” Read More