Sarbanes Oxley Act 2002 - Research Paper Example

Sarbanes – Oxley Act of the of the Sarbanes – Oxley Act 2002 With regard to the Information Technology sector, compliance of financial data with the Sarbanes – Oxley Act 2002 poses specific problems. The following discussion establishes this contention. Central to the Sarbanes – Oxley Act is the integrity of corporate financial data. With regard to the Information Technology sector, compliance of financial data with this act poses special problems. This is due to the fact that financial data is generally located in manifold applications and storage sites (Stephens, 2005, p. 102). With the advent of the Sarbanes – Oxley Act, information regarding every aspect of the business conducted by a company that influences financial performance has to be reported. This is in addition to the financial data that was previously to be found in the general ledger and other conventional financial data locations (Stephens, 2005, p. 102). Such information is usually to be found in several locations and on dissimilar systems. This makes it imperative to have in place a mechanism that facilitates the retrieval of data from multiple applications; otherwise, complete compliance with the provisions of the Sarbanes – Oxley Act cannot be realized (Stephens, 2005, p. 102). There is considerable difficulty and intricacy involved in complying with the Sarbanes – Oxley Act. Data has to be shown to be authentic, and this obliges auditors and company executives to confirm the integrity of the financial data of their enterprise that influences the financial position of their company (Stephens, 2005, p. 102). Complying with the provisions of Sarbanes – Oxley Act proved to be much more burdensome for companies. This includes among other things, the capacity to validate the processing and transmission of data at all times, regardless of the specific phase of the life cycle that the data may be subjected to auditing or investigation. A major consequence of these requirements is that the Information Technology division of a company has to ensure that authentication capacities are inherent in the storage repositories and software applications (Stephens, 2005, p. 102). Furthermore, a major issue related to compliance with the Sarbanes – Oxley Act is that related to the amount of time involved in accessing data. For instance, there has to a rapid disclosure with regard to a business event that has substantial influence on the revenues of the company (Stephens, 2005, p. 102). Thus, compliance with this act necessitates the capacity to authenticate, search and access the relevant records and data in near real time. The Sarbanes – Oxley Act 2002 was enacted by Congress with the express intention of enhancing the reliability and accuracy of corporate disclosures. This initiative was aimed at protecting the interests of investors. In the absence of confidence among investors, no publicly traded company can hope to survive (Parkinson & Bloom, 2003, p. 73). This requires the management of these companies to generate and sell technology strategies that promote investor confidence. This has been clearly demonstrated by the fact that prominent companies have now undertaken the task of analyzing the business issues that could be held responsible for impairing their financial reporting (Parkinson & Bloom, 2003, p. 73). Section 404 of the Sarbanes – Oxley Act 2002 requires companies in the US to ensure that there are controls against risk with regard to processes that deal with financial data. Such control is to be exercised via the establishment, documentation and structuring of financial data (What is Sarbanes-Oxley?, 2006). Moreover these companies are obliged under this act to evaluate whether they enforce sufficient security supervision to prevent theft or corruption of data. Furthermore, companies have to assess whether the roles, responsibilities, permissions and access rights of their employees could be abused in order to commit material fraud or to misrepresent financial data (What is Sarbanes-Oxley?, 2006). It has become incumbent upon the management of companies to ensure that they have the capacity to identify problems, assess the severity of problems, and comprehend and transmit the materiality of problems. In addition, these features have to be described in the language of risk management. Several companies discovered that despite having in place systems that formally addressed risk, there were several lacunae in documenting or describing risks. With regard to companies that adopted an informal approach to process, several serious drawbacks were discovered in the documentation relating to their system and process (What is Sarbanes-Oxley?, 2006). This was in addition to significant defects in the controls exercised. In the context of the dot – com companies, a genuine need to generate an intricate structure of formal documentation and controls was clearly discernible (What is Sarbanes-Oxley?, 2006). This was seen to be a prerequisite for evaluating their effectiveness. Moreover, subsequent to the Securities Exchange Act of 1934, the most significant reform to business practices in the US was effected by the Sarbanes – Oxley Act 2002. As a matter of fact, the influence of this act on the business environment has been unprecedented. All the same, the implementation of this act has not be without considerable controversy, and one major area in this regard has been the vast expenditure incurred (Huang , 2009, p. 595). There are distinct law and practice limitations that promise to have a much more dramatic effect on foreign issuers, in comparison to that on the US firms. There have been quite a few studies that have demonstrated in no uncertain terms that the costs entailed in complying with the Sarbanes – Oxley Act are significantly higher than perceived benefits (Huang , 2009, p. 595). Nevertheless, compliance with this act provides the benefits of enhanced identification, documentation and testing procedures. With improvement in internal controls companies procure the benefit of better quality of financial reporting and enhanced protection with regard to the interests of public investors. Moreover, it has been predicted in reliable quarters that the costs related to compliance with the Sarbanes – Oxley Act are likely to come down dramatically, in the near future (Huang , 2009, p. 595). The enactment of the Sarbanes – Oxley Act 2002 was aimed at rectifying the gross defects in accounting and corporate governance practices in the US (Jickling, 2008, p. 1). However, compliance with the requirements of the Sarbanes – Oxley Act 2002 has become much more burdensome from the economic perspective and with regard to accountability in practice to companies. List of References Huang , H.-W. (2009). Sarbanes-Oxley section 404 compliance Recent changes in US-traded foreign firms’ internal control reporting. Managerial Auditing Journal, 24(6), 584 - 598. Jickling, M. (2008). Sarbanes – Oxley and the Competitive Position of US Stock Markets. In W. H. Fletcher, & T. N. Plette, The Sarbanes – Oxley Act: Implementation, Significance and Impact (pp. 1 – 20). New York: Nova Science Publishers Inc. Parkinson, J., & Bloom, S. (2003). Surviving Sarbanes – Oxley. Optimize, 73 – 80. Sarbanes – Oxley Act . (2002, January 23). Washington, DC, USA: 107 Congress of the United States of America. Stephens, D. O. (2005). The Sarbanes-Oxley Act: Records management implications . Records Management Journal , 15(2), 98 – 103. What is Sarbanes-Oxley? (2006). 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