Sarbanes-Oxley Act - Essay Example

Running Head: SARBANES- OXLEY ACT This is a study about Sarbanes-Oxley Act of the year 2002. More precisely, it is going to answer these questions, in the order in which they are presented; “What is the Sarbox Act of 2002 and why was it enacted? Do you think it is too much regulation? Why or Why not? And What are the costs and hurdles that firms now have to contend with because of the new regulation?" The Sarbanes- Oxley Act or the Sarbox Act is an Act of Investor Protection as well as Reform of Public Company Accounting.

It was enacted in mid-year 2002. This was subsequent to numerous high profile scandals in the corporate businesses. Examples include WorldCom and Enron companies. According to section 404(a) of the Act, it is a requirement that managements of companies assess their Internal Controls effectiveness and report on the same over financial reporting. Also, Subsection (b) of the same section, calls on independent auditors to attest to the assessments done by the managements. This is regarding Internal Controls effectiveness.

The opinion of the study is that it is not too much a regulation. As stipulated by the Securities and Exchange Commissions report, the enactment of section 404 of the Sarbox Act have proven too costly. The outlays are incredibly high to companies, which has led to some attempts at their reduction while upholding effectiveness like the reforms of year 2007. (sec.gov, 2009) However, the cost of implementation is far much less than the 2001-2002 business scandals cost. These are with the inclusion of Global Crossing, Tyco, WorldCom and Enron companies, which shook the confidence of investors a great deal.

(Hallberg, 2008 p390) A case at hand to support the argument that, it is not too much regulation is that of the collapsed Enron Company. This is where, in October 2001, Enron company had made public their third quarter earnings report where they purported to have realized an after tax Earnings of USD 1.01 billion. On the same date of reporting, Enron had cut down equity of shareholders by USD 1.2 billion, which it claimed to be the rectification of accounting errors. In November, 2001 the company filed with the SEC Form 8-K, considering the current events.

This form 8-K stipulated that Enron would like to restate their financial statements from year 1997 through 2001 June. These statements led to a shocking fall of income of USD 569 million. In the same year, 2001, Enron Company filed for bankruptcy which triggered investigations. (De Vay, 2006 p3) As said earlier, as stipulated by the Securities and Exchange Commissions report, the enactment of section 404 of the Sarbox Act has proven too costly. The outlays are incredibly high to companies, which has led to some attempts at their reduction while upholding effectiveness like the reforms of year 2007 amongst others. (sec.gov, 2009) The costs caused by the implementation of Section 404 of the Act- which has been said to be the most costly and difficult to implement as stipulated earlier, are the most worrying.

For example, a follow up survey showed that the reporting requirements by section 404 of the Sarbox Act resulted to a 39% escalation of costs in 217 surveyed firms. These were caused by the rise in external software and consulting costs as well as the increment in external auditors fee. (financialforum.umb.edu, 2005) This is besides other minimal costs implication to various firms.Reference:De Vay, D.L. (2006). The Effectiveness of the Sarbanes-Oxley Act of 2002 in Preventing and Detecting Fraud in Financial Statements.

Universal- Publishers.financialforum.umb.edu. (2005). Sarbanes- Oxley Act of 2002 and Its Effects on American Business. Retrieved 12 December 2010 http://docs.google.com/viewer?a=v&q=cache:kFGOzqWEUkMJ:www.financialf orum.umb.edu/documents/Sarbanes- Oxley.pdf+COSTS+OF+THE+SARBOX+ACT+2002&hl=en&gl=ke&pid=bl&sr cid=ADGEESjMe3bvlE6BXaEI2xcHwa4DtaaubNfDEcPnoYzRHmZSUtQI9HQ 9kf477do0JTYn- Ae_QEjF8eSiu5Sw8xVDl0DpKkDZ1BIh7URC6DU3XMWvqchiC- vP0RYkXb7OUZRiqlZ8GxQU&sig=AHIEtbTW1cvUSIrOJpUnOzn- pnqN0BaWFAHallberg, B. (2009). Networking, a Beginners Guide, Fifth Edition.

McGraw Hill Professional. Edition 5, illustrated.sec.gov. (2009). Study Of the Sarbanes Oxley Act Of 2002 Section 404 Internal Controls Over Financial Reporting Requirements. Retrieved 12 December 2010 http://docs.google.com/viewer?a=v&q=cache:1PCeCd40W6UJ:www.sec.gov/ne ws/studies/2009/sox404_study.pdf+SARBOX+ACT+2002&hl=en&gl=ke&pid=b l&srcid=ADGEESiarlRjvqIJPKfB7EHG2Dzlc4ofWKwjV0CUeJZjzfR89y2e0TM 5shb-klBoxVNgbPAbwSUVyuynMZKru-Cc72KZdihxpOHs0Rn- s1iuUrpfDptGft27- cXvZKBe3RZRo516w9u5&sig=AHIEtbQySOb16gkwLS1PLiCxbRLvU- iVTQ&pli=1