Adoption of the Sarbanes-Oxley Act of 2002 as an Important Piece of Legislation

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Introduction

The Sarbanes- Oxley Act was legislated in the year 2002 to enhance new rules and standards for all US public companies, management, and public accounting firms. The sponsors of the law did it due to the public outcry on the increased cases of scandals which were affecting many public companies in the USA, with some collapsing and shares prices declining resulting in huge losses. As a result of this, public confidence in securities investment was dented. To ensure the enhanced standards are followed, the act contains corporate board responsibilities as well as penalties chief executive officers can face in case of mismanagement (Institute of Internal Auditors, 2008).

Analysis of new or expanded standards for all US public company boards of directors, management, and audit firms required by SOX

With the new enhanced standards, public companies are supposed to control all their information controls and audit reports. With technology advancements, most companies use Information Technologies to manage and control data thus the requirement of the controls as indicated by the SOX act. Under the SOX act, the chief information officers are supposed to be accountable for the issues of information security and accuracy.

The information officers should also ensure that their Information Technology systems are reliable to ensure instances of alteration are minimized. The Sarbanes- Oxley act contains two clauses with either crime or civil certifications. The act further contains a set of internal procedures which are designed to ensure there is honest and accurate disclosure of financial information (Cihon & Castagnera, 2008). Under this act, the signing officers should always ensure that they are the responsible party for establishing and maintaining internal controls.

They should certify that the designed internal controls have been set in such a way that the material information relating to the company or its subsidiaries is known to all the responsible parties especially during report making. In addition, the chief information officers are supposed to test the reliability and credibility of the companys internal controls to ensure that the reports given reflect the situation on the ground (Cihon & Castagnera, 2008).

Under the SOX act, it is a requirement for the management to constantly produce an (internal control) report. In this report, the management is usually expected to reaffirm its efforts in ensuring that the internal controls have been established and financial reporting procedures maintained as recommended under the act. The report must also contain an assessment of the just-concluded fiscal year of the company.

In the end, the external independent auditors should be able to provide the reports about the internal controls to the manager recommending adjustments if necessary after evaluating them. The SOX Act states that the audits should always be held once or twice a year to ensure the internal controls have not been modified.

Why the New Enhanced Standards Are Necessary

The new enhanced standards are necessary since they have resulted in reduced cases of fraud within many public organizations in the United States. This has been made possible by the increased liability the act puts on the CEOs. The new enhanced standards have ensured that cases of fraud or mismanagement are noted earlier, as a result, making it easier to rectify the situation and minimize losses. However, some people argue that though the act was introduced as a savior of the public companies it hasnt been a savior since all the action has done is to force the chief executive officers of public companies to face criminal charges if they present documents, which were are genuine

The Benefits and Costs of the SOX

Under the SOX Act, the Chief Executive Officers are held responsible for all the accounting information, and in case of misconduct penalties or sanctions follow. This means that CEOs must take full responsibility and provide well-detailed evidence showing that their internal controls are working as failures could result in jail terms.

The SOX act enables the investors to evaluate the process and performance of the management responsibilities and to them during an end of a financial year. The improved disclosure also helps the company in detecting cases of fraud if any at earlier stages thus there are fewer adverse effects with the expected quick response and early rectification of the situation. The act also ensures that there is accountability from all those who deal with financial statements preparations and reports (Holt, 2008).

The SOX act provides a system that merges the activities taking place in the company ranging from workflow to document management as well as publishing creating compliance processes that manage the company both efficiently and effectively. However, due to the assessments needed and the hiring of external auditors, the act leads to increased costs for the company. Implementation costs especially during the first year for any company are also very high due to the new devices and modifications required. This affects the profitability of public companies and also their competitiveness compared to private organizations (Aquila, 2004).

Reference List

Aquila, J.M. (2004). Tallying the Cost of the Sarbanes-Oxley Act. Web.

Cihon, J.P., & Castagnera, J.O. (2008). Employment & Labor Law. 6th Edition. London: Cengage Learning.

Holt, M.F. (2008). The Sarbanes-Oxley Act: costs, benefits, and business impact. New York: Butterworth-Heinemann Publishers.

Institute of Internal Auditors (2008). SARBANES-OXLEY SECTION 404: A Guide for Management by Internal Controls Practitioners. Web.

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Adoption of the Sarbanes-Oxley Act of 2002 as an Important Piece of Legislation

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