Sarbanes-Oxley Act 2002 Is Also Term Paper

  • Length: 15 pages
  • Sources: 20
  • Subject: Accounting
  • Type: Term Paper
  • Paper: #26905185

Excerpt from Term Paper :

The investors got intoxicated by fraud happened to them because of greedy people. Thousands of employees left as the stock market went to the peak but most of them left their jobs due to low pay as well. (Kerry Hannon, July 6, 2005) bill was passed by the President Bush after the corporate fraud nearly just after three weeks on April 25, 2002. It referred to the Senate Banking Committee which was clearly supported by the president and SEC. The bill was passed for the corporate fraud, regulatory board with investigative, enforcement powers to check out the accounting company, securities and laws for accounting and also to punish the corrupt auditors. However, more than 200 federal prosecutors were involved in this fraud. At the same time, the chairman of the committee, Senator Paul Sarbanes also prepared a bill which was passed on June 18, 2002 to the Senate Banking Committee. After few days, WorldCom accepted that it had overstated it by more than $7.2 billion during the past 15 months because of wrong calculations in accounting for its operating costs. On the following day, the Senator introduced the Senate Bill 2673 as well. A conference was held in the White House where the Senate formed a conference committee. When the bill got approved by the committee members they named it "The Sarbanes-Oxley Act of 2002." (Elisabeth Bumiller, July 31, 2002).

Section 404 was enacted in 2002, after the corporate accounting scandals to protect the investors. On November 2004, U.S. companies working on larger scale took effect with the financial matters that ended up, applies with the public company with more than 300 U.S. shareholders for presenting annual reports with the SEC. Although, SEC gave the same process to increase the scale of smaller U.S. companies and also to non-U.S. chosen company. The requirements of section 404 led a debate on if the company's costs of compliance are prohibited. Almost five hundred companies have reported short listed under the new law. A file report is required under the section 404 of Sarbanes-Oxley containing the following, a statement on the company's internal controls on the management of the company from an accounting firm that audited the company's finance statement, keeping the secret to any of the weakness of the internal controls in the company, a statement to recognize the framework to examine the company's internal control, a statement about the responsibilities of the management for the internal control over financial reports and a test by the management to check out the company's internal control whether the controls are effective or not. This report should be confirmed by the auditor for the effectiveness of the company's internal control including the maintenance of the company as well. The Sarbanes-Oxley Act only effects on non-U.S. companies who are cross listed in U.S. And also on the firms which belongs to less developed countries. However, as the halt of section 404 has not stopped the smaller companies which are non-U.S. companies from moving to delist although many of the companies are questioning about whether the new reporting will make the adjustment with law being very expensive and consuming a lot of time to maintain the U.S. market flow. Non-U.S. companies with large capital with huge financing needs will probably find that section 404 which is indeed a worthwhile but on the other hand, companies with smaller floats and less need to increase the capital in the markets may find section 404 as benefit to remain on the list. Companies who focus on the internal controls help them to be aware about the investors who are willing to start in private financings with some of the government control for their standard with the public company to apply the Sarbanes-Oxley. Many of the investors are seeing this as a benefit or assuring their funds participants that they are investing on the right place. Non-U.S. companies who are willing to raise their capital may not escape the Sarbanes-Oxley standards as some of the requirements will be insisted by the contract when the financing is provided by an investor including some other laws. It has became clear for the companies who are in the United States or are non-U.S. companies that if the investors are in small quantity than it will lead them to a lower stock market valuation (White & Case, April 6, 2005). Sarbanes-Oxley Act has affected the small companies comparatively to large or medium size companies. It is confirmed by the SEC as it is very hard to apply SOX, small companies are given time for one year extension as the firms were having problems to establish the requirements by SOX. Higher cost of SOX drained the small companies in financial crisis still Sarbanes-Oxley Act has insisted the small companies to comply with the same rules and regulation as the Act doesn't take small firms as a complication in the market structure like large companies. Larger scale companies have variety of problems such as accounting problems; thus, they are more pressurized for SOX controls as compared to smaller firms, they have a very simple business structure with simple financial statements. Small firms are usually owned by the entrepreneur because they don't have much investor interests as they won't cheat their families and public shareholders so there is less danger from there side. SOX believed that less attention of director leads towards fraud in trading as it is investigated that fraudulent act is mostly done in large corporation then in smaller ones. However, main purposes for SOX rules are made to decrease frauds. Many of the people expected after SOX passed in 2002 that the cost will reduce within a few years but still till 2006 cost of SOX remains the same. SEC expected a decline of 26% for SOX complying small and large companies in the second year but the companies found that the auditing fees have gone down of only 13% in the second year. These costs are taking away resources of the companies for they cannot spend or expand their company on any cost. Most of the companies went towards privatization since the passage of SOX but most of them were small firms with small revenue, assets and capital. There are many reasons for small companies who went private including that about 110 of the 236 firms were de listed in January 2001 and July 2003, about 60% of companies privatized because of high cost of SOX, in addition, about $900,000 cost increased for being public in pre-SOX but in post-SOX it went up to $1,954,000. Thus, these costs increased the price of audits plus higher premiums for the directors. Secondly, SOX requirements included that at least only three outside members and one financial expert should be in an audit committee. After the announcement for SOX, eventually increased the cost of public and private costs went much lower of about $50,000 to $100,000. Another reason is that, many of the public firms knew that they won't be able to spend much on their business after adopting SOX's regulation so they went out of the market but most of the large firms remained in the market for they had enough capital to spend. However, about 130% of small firms went towards privatization, the fact is the SOX cannot benefit the small public firms as the costs increases in the public sector. Compared to the large firms, small firms cannot handle the cost of compliance so they go private by deregistering from public market or by selling their firms to a private owner. After the SOX implementation, demand went up for CEO's and CFO's to attest the financial statements but most of the CEO's were not expertise in verifying the statement whether it was correct or not. They spend a lot of time in learning for the interpretation of financial statement. On the other hand, executives spent a lot of time to keep an eye on audits, also going in meetings to make sure that it is compliance with the SEC, making deadlines of reports filed in SOX, creating procedure and getting approval of the directors before releasing any financial reports. Increased cost in public sector did not improve the securities analysts, as a result small firms were not getting the amount of securities analysts that they needed. Lack of liquidity is another reason for companies moving towards private. Most of the firms entered in public market for improvement of liquidity but the firms that weren't liquid moved towards private after SOX was announced and became more beneficial. They felt that this will build up their firms by getting capital as this opportunity was not available for public companies. Thus, small firms entered the private section to avoid time pressures and tasks which are associated with SOX. There was another situation of SOX that mostly private firms are owned by public stockholders. About triple of 37% of Firms went…

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