Sarbanes-Oxley Act Was Enacted to Facilitate in Term Paper

  • Length: 4 pages
  • Subject: Accounting
  • Type: Term Paper
  • Paper: #93100281

Excerpt from Term Paper :

Sarbanes-Oxley Act was enacted to facilitate in guaranteeing the correctness of financial reporting by the public listed companies. In the stir of millions of dollars of investor's money going down the gutter because of their reposing faith on the financial reporting by companies who did not present the true picture as regards the financial state of affairs of the company, Sarbanes-Oxley was a response to the common citizen's clamor for change in this area. (Impact of Sarbanes-Oxley Act on Colleges/Universities) Basically, the Sarbanes-Oxley Act restructures the federal rules of public company corporate governance and the reporting compulsions intensifies norms of accountability in case of directors and officers, auditors, security analysts and legal counsel; and stipulates particular securities infringement to be offenses. (Sarbanes-Oxley Basics for Private Companies & Investors)

Sarbanes-Oxley looks for enhancing the correctness of financial reporting of publicly traded corporations. (Impact of Sarbanes-Oxley Act on Colleges/Universities) The Act is stressing the significance of control mechanism in the organization, and this presents the scope to perform actions you might not possess the plan or resources to do in the past, like address disorganization. (Sarbanes-Oxley: Red tape or opportunity for treasury managers?) Sarbanes-Oxley Act gives the authorization of corporate governance reforms. It needs corporations to set up audit committees, excludes publicly audited clients from entrusting the job to an accounting firm which take up audit of financial statements in case of non-audit services, and calls upon corporations to reveal all material aspects of the business dealings which is not reflected in the balance sheets. It improves the duties and autonomy of the audit committees. The Act builds a new Accounting Oversight Board to establish criteria and manage accounting firms, makes an arrangement for archiving every audit or review working papers to be preserved for 7 years which bear conclusions in audit reports, stipulates that the audit partners will be selected every 5 years on rotation basis and necessitates audit team members for a 1 year moratorium prior to accepting employment with a client in major financial positions. (Impact of Sarbanes-Oxley Act on Colleges/Universities)

Modifications in reporting timing norms must enhance the timeliness of financial information and accessibility, specifically as explained in the SEC rule. Responsibility norms modifications spell out the duties of the audit committees, the CEO, CFO, and others. These are a move in enhancing the running of administration and enforceability as the obsolete procedure of blaming the company as responsible became too indistinct to be enforceable or to give any prevention. The considerable explanation and enhancement of divergence and independence norms must enhance the correctness, steadiness, suitability, and totality of financial information. Apart from that, they play a part in elucidating administration, duty, and enforcement. (Sarbanes-Oxley: Impacts on Financial Transparency)

The accounting profession received a severe setback to its standing following the accounting scams coming to light at Enron and WorldCom and the ultimate downfall of Top 5 accounting firm Arthur Andersen, is obviously getting a high in the public memory after the enactment of Sarbanes-Oxley Act. A Gallup Poll published during August revealed the public discernment of the accounting career has certainly come to be more encouraging following the months after the scams instantly following the enactment of the Sarbanes-Oxley Act. It was revealed by the survey that the profession had a positive rating of 45%, jus 2% points lower than its positive rating in the Gallup Poll conducted in 2001 prior to the accounting scams. (Sarbanes-Oxley: What It Means to the Marketplace) As regards the public accountant which audits publicly traded companies, Sarbanes-Oxley confronts the auditor and other financial managers to verify at every accounting treatments, not from the perspective of finding out a suitable legal or a standards-compliant stance, but if such treatment outcomes in the true reporting of the financial state of affairs of the organization. (Impact of Sarbanes-Oxley Act on Colleges/Universities)

As Sarbanes-Oxley bans firms from employing their independent auditor for certain consulting and non-audit work, and a lot of CPA firms particularly the Big Four are concentrating more on their biggest audit clients. This is paving way for a lot of scope for firms. (Public opinion of CPAs starting to climb: Improvement attributed to focusing on quality) The audit committee and supervising external auditor will enhance audit quality and assist in stopping managers from narrowing the extent of an audit. Sarbanes-Oxley's urgency that managers confirm to the standard of the internal-control mechanism will raise management's awareness of the accounting process and give guarantee of excellence of internal control to outsiders. The improved concentration on financial revelation will impel managers to undertake increased importance in the process of financial reporting. (Sarbanes-Oxley: What It Means To the Marketplace)

Nevertheless the Act has its drawbacks also. This latest and its corresponding conventions put strong, intricate and arduous need on every public corporation. The smaller upcoming corporations have a reason to worry about on this account. No more scope is present for just "carrying out what we know is correct" or recruiting one of "the best and most promising" technical or marketing luminary to the rank of financial management in the speedily rising public company. In case of smaller upcoming company, the Sarbanes-Oxley put a nearly overpowering load on the CEO and the CFO. The terrifying results of failing to accomplish these improved principles bear criminal injunctions containing detention. (The Emerging Company and the SEC: The Significance of the Sarbanes-Oxley Act) The evaluation of management's internal control mechanism and the testimony of the auditor in respect of these were optimistic necessities in case of all companies, big or small, as these necessities assist in the safeguarding of investors. But this latest internal control authorization, early on, will be an adversity on the small, publicly listed companies. There will a lot of problems for the smaller companies being amenable as the expenses are very massive. Sarbanes-Oxley has no regard for size of the company and a lot of companies were not equipped with the internal control to meet the terms of the latest reporting obligations. Apart from that, it may not be financially viable in case of some of those smaller companies to prepare themselves for acquiescence. (Sarbanes-Oxley: Impacts on Financial Transparency)

A lot of smaller companies as of now do not satisfy with the internal-control reporting obligations, and the rising costs of execution would not be financially practicable. Auditors have an apprehension that new necessities will influence a general practice among the smaller public companies, putting their signatures on audit evidence fundamentally based on substantive testing rather than on a strong, costly system of internal controls. Smaller companies in their endeavor to issue shares to the public with fight back with the exorbitant costs of the latest reporting necessities, leaving the public markets as an extravagance for catering exclusively to bigger, reputable companies. (Sarbanes-Oxley: What It Means To the Marketplace)

In case the norms for auditing come to be excessively set, it could lead to the auditors becoming devoid of their decision making capabilities. The accounting profession shall no more be regarded as a professional career. It will not be serving any purpose, in case the supervisory body views the profession as immoral and not self-regulating. This downbeat image of the profession caused the group also to be concerned about the students joining the profession. Many had reservations regarding the potential of the profession to draw individuals of superior quality. A lot of accountants hold that Sarbanes-Oxley has put the entire accounting profession under the scanner when the truth is that just a small group of accountants might have behaved in an immoral manner. Upon interrogating if the regulation was a cure-all for enhancing the quality of financial reporting, it is comprehended that Sarbanes-Oxley will not be capable for eradicating every deception. It will be just a matter of time when the degree of 'beneficial' aspects will be known. Whereas, it was everybody's concern that the regulation will enhance the financial reporting procedure, many were sharp to indicate that deception in financial statements will not vanish. Honesty and principled behavior cannot be imposed by enactment of regulations. Individual's lookout for opportunities for performing unlawful activities. Nevertheless, the act will be supportive as it has an inbuilt system of checks and balances. But the 'tone at the top' is what matters. (Sarbanes-Oxley: What It Means to the Marketplace)

To conclude, Sarbanes-Oxley was an important section of rule making a lot of modifications in the process of financial reporting. Several requirements continue to be contentious, but the general aim of adding clarity to the financial information of public companies and augmenting safeguards for investors seem to have been done. In case the U.S. is to persist in its effort to draw global financial capital and keep up the trust of the American investors, enhancing clarity in financial matters is a vital objective. Sarbanes-Oxley gives the instrument to accomplish this. At the current level a lot of the provisions of the Act await implementation. In spite of the goal of the legislation, in case these instruments are efficient and satisfy…

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