SARBANES-OXLEY ACT 2002 IN MY OWN OPINION - Essay Example

At the turn of the 21st century there were a lot of problems with the financial marketplace. The world saw numerous multinational companies acting unethically and cheating their accounting systems in order to exploit the investor community. Companies such as WorldCom, Tyco, and Enron were involved in some of largest financial scandals in human history. In the investor community there was in chaos as investors began to lose confidence in the financial statement being released by companies. The government had to step in order to stop the bleeding.

Two members of the US congress had the foresight to find a solution to the problem. The solution that was implemented is known as the Sarbanes-Oxley Act of 2002 (SOX). The Sarbanes-Oxley is a piece of legislation that changed the business world forever. The Act was created in order to raise investor confidence in the marketplace. One of the major problems the markets were facing was that greedy corporate officials were taken advantage of their position in order to make themselves rich at the expense of the shareholders and other stakeholders of the company.

The Sarbanes-Oxley Act fixed the problem by making the CEO and top officials liable in cases of fraud. The section 302 of the Sarbanes-Oxley Act mandates that senior management certify the accuracy of the financial reports (Answers, 2010). If there is fraud present in the financial statement of a company the top executive of the firm faces fines of up to $25 million and prison terms of up to 20 years. Another problem that existed prior to the creation of SOX was the possibility of collusion between the external auditors and the executive managerial staff.

In the Enron case the auditors knew about the fraud, but decided to stay quiet due to economic interest. SOX changed the rules of the game with the creation of the independent auditor report. An auditing firm of a public corporation cannot have any other accounting contracts with the firm they are auditing. SOX also helped prevent fraud because it implemented new internal control protocols that help prevent fraudulent activity. Section 404 of SOX requires that each annual report of a public company contain an internal control report.

The internal control reports have to include the following two things: a) A statement of management’s responsibility for the establishment of an adequate internal control structure for financial reporting; b) assessment of the effectiveness of the internal control structure at the conclusion of the latest fiscal year (Sec, 2008). Section 409 of the Sarbanes Oxley Act section provides a new reporting standard that obligates public companies to issue real time issuer disclosures concerning important events that affect or may the financial performance of the company.

Investors deserve to have up to date information about any type of financial transaction that affects the financial results of the firm. The Sarbanes Oxley Act was very effective at stabilizing the investor community by ensuring a higher ethical behavior from corporate America. The act was implemented at a time when the financial markers need added assurances about the behavior of corporations. Wall Street could have collapse if the Sarbanes Oxley Act had not come to rescue the financial markets.

ReferencesAnswers.com (2010). Sarbanes-Oxley Act 2002 – SOX. Retrieved December 12, 2010 from http://www.answers.com/topic/sarbanes-oxley-act-of-2002-sox Sec.org. (2008). Final Rule: Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. Security and Exchange Commission. Retrieved December 12, 2010 from http://www.sec.gov/rules/final/33-8238.htm