Sarbanes-Oxley Act of 2002/Methods of Depreciation

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Table of Contents

Introduction: The Sarbanes- Oxley Act 2002
Key Components of Sarbanes-Oxley Act of 2002
Objective of Sarbanes-Oxley Act 2002
Conclusion: Achievement of Sarbanes-Oxley Act goals
Reference List

Introduction: The Sarbanes- Oxley Act 2002

The Sarbanes- Oxley Act 2002 is one of the federal laws in the United States of America that were established with a major objective of protecting investors by improving accuracy and dependability of the so-disclosed corporate information. All boards of directors in public companies, public management, and accounting companies have to comply with the Act with regard to laws of security.

The Act was named after Senator Paul Sarbanes and Michael Oxley who were representatives in the lower house in the United States. Also referred to as Sarbox, the Act was passed on 30 July 2002. With its enactment, all managers of public corporations were charged with the responsibility of personally certifying the validity of any financial information to be reported (Surowiecki, 2005, p.46). The act also set very severe penalties for organization management that contravened it.

In addition, the Sarbanes –Oxley Act of 2002 made it a requirement for all public corporations to ensure that independent external auditors audit their financial accounts. These auditors enable firms to have a clearer picture about the correctness of their statement of accounts (Baker & Taylor, 2000 p.1). The report also recommended that managers and board of directors in public corporate organizations had to play an oversight role.

Key Components of Sarbanes-Oxley Act of 2002

The key components of Sarbanes-Oxley Act 2012 include several titles with the first being the Public Company Accounting Oversight Board (PCAOB), which is regarded as title 1 with the key responsibility of acting as a watchdog to all the accounting firms set up for the public.

The title performs auditing duties. Title 1 is also the branch of Sarbanes-Oxley act that registers auditors before they can perform public and private auditing duties in the country. It is bestowed the authority of identifying special procedures that audits must conform to when examining auditing works. It is also supposed to perform quality assurance and policy control functions (Surowiecki, 2007, p.29) of auditing in the federation.

With the implementation of title1, the United States is assured of uniformity in business standards. With such similarities, the member states can therefore trade at equal levels and be able to use similar and related business documents with ease hence promoting the level of interactivity in the auditing fraternity.

Finally, the title also ensures that all public auditing firms in the federation are compliant to the directives of Sarbanes-Oxley Act 2002. It is charged with the authority to guarantee the federation that the recommendations of SOX are implemented with by every auditing firm.

The next component of Sarbanes-Oxley Act 2002 is auditor independence. This component is commonly referred to as title II. The title contains details of how auditors are supposed to work independently without influence from external forces. According to this component, auditors should avoid carrying out duties in areas or field that they are likely to have conflicts of interest (Baker & Taylor, 2000, p.1).

Title II acts as a barrier to conflicts of interest in duties performed by auditing firms in the whole federation. Conflicts of interest result in biasness. Therefore, the quality of auditing is compromised. The title also ensures that auditing professionalism is portrayed in all auditing works in the United States. It is therefore the mandate of title II to address the issue of admitting new auditors into the auditing profession.

In such processes, all requirements should be verified in order to ensure that professionalism is upheld (Surowiecki, 2005, p.46). The component spells out the relationships that should exist between different auditors and or how they should collaborate in ensuring success of auditing as a profession. Such collaboration includes rotation of audit partners in a bid to ensure quality standards in auditing.

This constituent also monitors auditing firms to ensure that they purely conduct auditing duties. Regulations of this nature bar the auditing firms from offering other related services to clients of auditing (Baker & Taylor, 2000, p.1) implying that auditing firms are restricted from undertaking services like accounting consultancy and business advisory among others.

The third component is corporate responsibility otherwise referred to as title III. The recommendation of this component is that auditing officers must take individual responsibility for their actions. Auditing officers should ensure the accuracy of all financial documents and reports.

The component also recommends that auditors must take responsibility for the level of completeness depicted in their financial reports. This element spells out how internal auditors and auditing committees in various corporations should relate with external auditors. From such interactions, the level of accuracy in auditing reports is boosted.

Title III ensures compliance with SOX. It goes beyond enumerating the standards to be complied with to listing of the penalties for forfeiture. According to Kuschnik (2008, p.92), section 302 of title III dictates that the chief executive officer and other executive officers must verify and consent to the level of reliability in their financial reports.

The fourth component is enhanced financial disclosure. This component states the requirements for financial reporting. The fifth component is the analyst conflicts of interest referred to as title V that aims at ensuring that investors have confidence in security analysts’ reports.

The sixth component is the commission resources and authority. The component is regarded as title VI. It indicates the actions that corporations should take to ensure that investors are confident about the reporting done by security analysts. The seventh component is studies and reports.

It is also called title VII. From this component, the comptroller general is supposed to research on the quality of auditing to make a report on it. The eighth component of SOX is corporate and criminal fraud accountability. It is also referred to as title VII or corporate and criminal fraud accountability Act 2002. Under this title, various penalties on auditing offenses are spelt out for example on fraud and report alteration.

The ninth component is the white-collar crime penalty enhancement also called title IX or White Collar Penalty Enhancement Act of 2002. The tenth component is Corporate Tax returns, which is also regarded as title X that stipulates that the Chief Executive Officer of corporations has to append his or her signature on reports of tax returns (Surowiecki, 2005, p.46). The eleventh component is corporate fraud accountability also referred to as Title XI. This title categorizes fraud and tempering of records as criminal offenses.

Objective of Sarbanes-Oxley Act 2002

The objective of Sarbanes-Oxley Act 2002 is to ensure investor confidence in public corporations in the United States of America. The Act targeted public corporations, public accounting organizations, and their management. The act also aims at ensuring that auditors perform their duties accurately, professionally, and independently. The Act also spells out the punishment for contravening auditing standards. In doing so, investor confidence is boosted and auditing uniformity is guaranteed in the United States.

Criticism

Although many people have attributed SOX with the high auditing standards in the United States, various critics discredit the Act. One of the criticisms of the act is that it is an indulgence into the management of companies by the government. Critics citing this loophole argue that it puts investors in the United States at a disadvantage point when trading with foreign companies.

This hitch has made the United States lose business. In fact, various companies have deregistered from the stock exchange of the United States. Other critics have blamed the Sarbanes-Oxley Act as the reason for having minimal initial public offers in 2008. The critics therefore link SOX with the 2007 economic recession in the United States (Gore, 2010, p.714). The other criticism of Sarbanes-Oxley Ac of 2002 is that the laws have not been able to prevent fraud.

The Wall street journal of December 21 2008 criticized SOX for not being able to implement its farness plan meaning that it had totally failed to achieve its major objectives. The Wall Street also criticized it for disabling young public corporations. According to this journal, the Sarbanes-Oxley Act 2002 was responsible for the destruction of the entrepreneurship spirit that existed in the United States of America before its inception.

It goes further to criticize SOX for the weakening of the stock exchange business in the whole federation (Strout, 2006, p.9). For example, in 2008, only six corporations became public meaning that companies in the United States fear turning public due to the stiff regulations posed by Sarbanes-Oxley Act of 2008.

The Sarbanes-Oxley Act of 2002 is also criticized for the high unemployment rate in the United States of America. This high rate of unemployment is attributed the increased fear by many investors to invest in the United States. Investors also fear turning their companies from private to public due to the tight regulations set for all public corporations by the Sarbanes-Oxley Act of 2002. As the number of employers decrease, the number of jobs for the employees decreases.

Others have attributed the location of the world top security market in Hong Kong and not in the New York City as it had been before the inception of SOX (Gore 2010, p.715). The tight regulation set by Sarbanes-Oxley Act of 2002 has made many capital investors to turn to other economies thus avoiding the United States economy.

Economic Consequences of Sarbanes-Oxley Act

There are various economic consequences of the Sarbanes-Oxley Act of 2002 on the economy of the United States. The first consequence is that, with the implementation of SOX, most investors have avoided the United States as a place to invest their capital as indicated by the low levels of companies that have turned public since its inception.

For example, in 2001, only 87 companies turned for initial public offer (IPO). The turnout was a very low ranking compared to the period when Sarbanes-Oxley Act was enacted. For example, in 2004, about 233 companies listed for IPO while there were more than 205 companies turning public in 2006.

The other consequence of Sarbanes-Oxley Act 2002 is that it has resulted in the decline of capital market in the United States because most investors have turned to other economies like those of London and Hong Kong in a bid to avoid the tight regulations set by SOX. The argument indicates that more and more wealth has been shifted to other economies (Strout, 2006, p.9).

It is also worth noting that the Sarbanes-Oxley act was blamed for the economic depression that has affected the United States since 2007 (Gore, 2010, p.714). The attribution is that, since SOX has resulted in few investors being interested with investing in the United States of America, there has been an increase in unemployment in the US. With the increased unemployment, the purchasing power of the United States of America has gone down.

The other consequence of Sarbanes-Oxley act is that it has led to a reduced number of companies listing for Initial Public Offer (IPO) in the United States because most of the corporations are small corporations that fear turning public. This fear is attributed to the high level of regulations that came with the Sarbanes-Oxley Act of 2002.

The auditing procedures set for public corporations through this act are prohibitive for small investors. Investors from foreign corporations are also shying away from investing in the American economy. Instead of investing in the United States of America, they will invest in the United Kingdom and other economies.

On the other hand, there are positive consequences of the Sarbanes-Oxley Act of 2002. The first positive consequence is that it has enabled shareholders of various corporations to become the owners of such companies. This advantage changed the old trend when managers almost worked as the only legal owners of public corporations.

Instead, managers work for the shareholders in public corporations in America today. Managers of public corporations have therefore become administrators of shareholders’ resources (Crook, 2006, p.150). The other positive consequence is that the Sarbanes-Oxley Act of 2002 has boosted the confidence of investors in public corporations. This case has been made possible by creation of trust through auditing procedures.

The financial reporting procedures have been made more transparent and accurate (Surowiecki, 2007, p.29) acting as a major building block for investor confidence. The fact that auditors and corporate managers are required to take personal responsibility for their reports makes the management of public corporations more transparent to the public (Crook, 2006, p.150).

Managers have also become keen, professional in their way of administration, and reporting. It is also worth noting that the financial reporting procedures that have been put in place by Sarbanes-Oxley Act of 2002 are among the legal requirements for every public corporation.

The procedures for financial reporting enabled many corporations to produce accurate financial reports. The Sarbanes-Oxley Act of 2002 has also enabled the United States to discover some fraudulent companies. For example, the fraud that was unveiled from Value Line company in 2009 saved the country about 24 million dollars hence standing out as an upward trend in combating fraud as crime. The whole of this process was made possible by the standards set in the Sarbanes Oxley Act of 2002.

Conclusion: Achievement of Sarbanes-Oxley Act goals

The Sarbanes-Oxley Act has been able to achieve some of its goals because the Act aimed at increasing investor confidence in the United States. Today, most of the investors in public companies in the US have confidence in these corporations due to the increased transparency in financial reporting (Surowiecki, 2005, p.46).

The second aim that this Act had was to reduce fraud. The Act has been able to achieve this goal because it has already unearthed several fraudulent corporations thereby saving the economy huge sums of money. The Act aimed at restoring ethical standards in the United States’ business world. Managers and executive managers have to comply with auditing standards in administration, communication, and communication (Crook, 2006, p.150).

Reference List

Baker, L., & Taylor, G. (2000). Author Biographies, Anthony Tarantino, PhD. Six Sigma Black Belt, Certified Sarbanes-Oxley Professional, 1(3), 1-1.

Crook, C. (2006). Atlantic Monthly. Executive Privilege, 297(1), 150-153.

Gore, C. (2010). The global recession of 2009 in a long-term development perspective’, Journal of International Development, 22(6), 714-38.

Kuschnik, B. (2008). The Sarbanes Oxley Act: Big Brother is watching” you or Adequate Measures of Corporate Governance Regulation? Rutgers Business Law Journal, 5(1), 64–95.

Strout, C., Fisher, S., & Kneale, D. (2006). New Yorker. The Mail, 81(44), 9-9.

Surowiecki, J. (2005). New Yorker. Sarboxed In?, 81(40), 46-46.

Surowiecki, J. (2007). New Yorker. Over There, 82(48), 29-29.

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