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Sarbanes-Oxley: A Brush Stroke
With the passage of the Sarbanes-Oxley Act of 2002, the landscape for public companies as well as accounting professionals who perform audits for public companies was forever altered. This five page white paper explores whether their is/was a real need for SOX, discusses the key changes the act brings for accountants, more specifically auditors and the varied reactions of public company management to the legislation. If you're new to this issue, this is a don't miss. If you aren't this is a paper to keep in your briefcase and refer to often! In July 2002, President Bush signed into law the Sarbanes-Oxley Act. Due in large part to unethical actions by large corporations, this historic act created stricter laws for the accounting and auditing professions. With the passage of the Sarbanes-Oxley Act of 2002, the accounting profession changed dramatically. This paper will explore the need for this act, the major changes it brings to the accounting and auditing professions, and reactions of companies to this act. The Sarbanes-Oxley Act did not appear overnight, though to many it would seem that it did. After a succession of corporate scandals was brought to the public’s attention, the government knew they had to step in and control the damage. Although these problems had existed for years, new financial scandals served as a catalyst for bringing them to public light. Seemingly all at once, the scandals of Enron, WorldCom, and Kmart came into public light, and the American public was shocked. The top executives of these companies, as well as the top auditors at their auditing firms were exposed as having committed fraud. Arthur Anderson LLP, previously one of the most powerful auditing firms in the United States, was caught shredding documents and went bankrupt. Problems such as eroding auditor independence, earnings management by big corporations, ineffective audit committees and Board of Directors, and lenient penalties for white-collar criminals were exposed to the public. The public was dismayed and shocked at these scandals, and Congress and President Bush knew they had to restore public confidence in the accounting and auditing professions and capital markets. In a speech, Bush stated, “A key to our economic development is consumer and investor confidence in the markets and in the integrity of Corporate America, and right now that confidence has been shaken.” The Sarbanes-Oxley Act aimed to help reinstill this confidence. In addition to building public confidence, the passage of the Sarbanes-Oxley Act helped insure that these types of scandals will not happen again. The Sarbanes-Oxley Act brought many major changes to the accounting profession, which is defined for the purposes of this paper as accounts employed inside companies, particularly those with responsibility for preparing financial information for public release. One of these changes states that the Chief Executive Officer and Chief Financial Officer of a company must accept responsibility for their published financial statements. The Insurance Coverage Litigation Reporter states that, “the CEO and CFO must make a certification in each periodic report concerning the internal controls of the company…Based on their knowledge, the report contains no false statements or omissions of a material fact.” 2 This statement addresses two separate issues: internal control and the accuracy of the financial statements. Despite being two issues, however, they are dually reported, and the reporting of internal control is a new addition to requirements. Additionally, “The [Sarbanes-Oxley Act] adds significant fines and longer jail time for corporate executives who improperly sign-off on the appropriateness of their financial statements, which are willing and knowing misstatements.”3 Specifically, Section 302: Corporate Responsibility for Financial Reports states that the CEO and CFO of each issuer shall prepare a statement to accompany the audit report to certify the “appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer.” Another significant change to the accounting profession is the creation of more specific laws and rules defining fraud and the destruction of records. During the corporate scandals previously discussed, the employees of those companies were discovered shredding documents. The Sarbanes-Oxley Act now makes it illegal to destroy or obstruct records. One final significant change to the accounting profession is new protection for corporate whistleblowers. The Sarbanes-Oxley Act provides protection for... [continued...] Want to know more? Download the White Paper "Sarbanes-Oxley: A Brush Stroke" for just $9.95. |
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