Sarbanes-Oxley Act overview and implementation

Sarbanes-Oxley Act of 2002 was intended to help investors be more certain of the steps they take while relying on a particular organization. There has been mixed reviews on how the act has impacted different corporations. While its application is important to most businesses, the cost factor overrides the advantages in some areas. This paper deals with defining the structure of the act and overall effect which the act has had on organizations. It demonstrates the extent to which smaller public companies are influenced by the rules stated in the act and the reaction of the Securities and Exchange Commission (SEC) to the responses received from these smaller companies. It also shows how the non-profit organizations such as universities are dealing with the compliance issues along with some recommendations on how to deal with the problems which might come forth.

The American Competitiveness and Corporate Accountability Act of 2002, better known as the Sarbanes-Oxley Act, was an outcome of financial scandals such as Enron, Arthur Anderson and Worldcom. It was passed on July 30, 2002, with the aim of reigniting the trust over the corporate sector of America. It was sanctioned as a legislation, as a way of safeguarding the public and shareholders from being victims of fraud and flaws in accounting methods. The SEC (Securities and Exchange Commission) controls the administration of this legislation. They are responsible for managing updates based on deadlines and setting rules according the current needs. The Sarbanes-Oxley act can be considered as a defining method rather than a set of business practices, which decide on the type of records and duration for which they need to be stored. The impact of this legislation ranges from the financial sector of organizations to the it side which handles the electronic records of different companies. As per the act, organizations need to have their data records, including all electronic messages exchanged in business transactions to be stored for a duration which cannot be less than 5 years. Breaking the rules would result in a fine being charged, prison time or both. This is making it necessary for the it department of companies to chalk out an efficient method which complies with all the rules stated by the legislation, while keeping the costs to a minimum at the same time. (Sarbanes-Oxley, 2009)

There act requires corporations to adhere to quite a few rules. The officers and executives at higher positions deal with preparing the financial report statements of the company. The executives are not allowed to loan money from the company they are employed in. Conducting trades within the organization are prohibited during situations of pension-fund blackouts. Revealing the compensation and profits registered received by the executives is a requirement. Internal audits certified by auditors outside the company are a necessity as well. Breaching the code of company security is punishable by law and can lead to different forms of fines. As per the act, there will be heavier penalties for executives falsifying information on financial reports. Firms are disallowed from providing legal expertise to other firms that they are currently auditing. The "SOX-404" compliance, directed at larger organizations requires them to have a yearly audit of their internal finances. The act on a whole is organized under 11 titles, the important ones being section 302, 802, 401, 404, 906 and 409. This act has its jurisdiction over all companies in the U.S. And abroad which have the safety of the equities and debts, registered with the Securities and Exchange Commission. (Exploring the Impact,2006)

The act led to the foundation of the Public Company Accounting oversight board which was accountable for tracking the auditors of Public companies. Unregistered firms do not have the authority to audit U.S. companies in the public sector. This requirement was however removed for private firms after some years. It eliminated the need to be registered with the board. A ponzi scheme led by Bernard Madoff in 2008 caused them to remove this waiver and made it necessary for all firms to have their details recorded with the SEC for their activities to be tracked.

The success of the Sarbanes-Oxley Act has been discussed from various standpoints over the years. The group of people who are against it, emphasize how its implementation proves expensive and need not be applied. They argue how the act failed in maintaining financial records and is causing the development of businesses in the U.S. To suffer. The Madoff scandal has been used as a way to illustrate its shortcomings. A different group believes the act to have brought in major improvements in the financial statements which are presented by organizations these days. It has led boosted the enthusiasm of shareholders investing in those companies. Proper compliance of all rules of the act, leaving no room for excuses is a must for this success to continue. The real impact is between these extremes. Even though several years have passed since the act came into being, it still remains as a hot topic of debate among legal experts. It has come a long way in increasing the reliability of how organizations operate. The breakdown of corporations such as Enron and WorldCom, which actually led to the creating of the act, were looked as feasible methods of corporate control before that. It was established and sponsored by Sen. Paul Sarbanes from Maryland and Rep. Michael G. Oxley from Ohio, which explains the name. They aimed at utilizing the act to strengthen the foundations of company managements and accounting departments. (Mello-e-souza and Awasthi,2009)

The expenses associated with Sarbanes-Oxley range from the fees of the accounting department and controlling the internal operations to the increase in insurance premiums of the employees. These extra costs are compensated by a cost increase for the customers. This can adverse affect the profit margins of smaller companies (Champy,2007). A major portion of their restricted resources go towards satisfying the laws. "Financial statement analysis involves exploring a company's numbers in search of explanations for past performance as well as telltale signs about the future. Like a detective, the analyst is seeking the key to unravel a mystery or patterns to help organize a vast array of numbers."(Mello-e-souza and Awasthi,2009). Employees who deal specifically with these compliance issues need to be hired apart from lawyers and accountants to deal with related problems which arise from time to time. Surveys conducted by Financial Executives International have shown the amount spent in Sarbanes-Oxley compliance to go beyond $4 million each year. A study conducted over different industries by Ernst & Young LLP in 2005 revealed the expenses to be over 50% of what was expected. This has led to the development of several small scale companies which offer help with regards to stabilizing Sarbanes-Oxley compliance issues. The act has had a major effect on financial sector of the company. Companies thinking of becoming public are reconsidering their decision. Companies which relied on American markets to increase their capital have gone in other directions. Public offerings are being conducted more in international markets than in the U.S.

Modification of the legislation rules stated in the act is necessary in order to assign it the status of being successful. The need for audits proves very expensive and can effectively nullify the revenue gathered by small scale companies. They will have no option but to go private if no changes are made for them. While no major modifications came into being right away, the Securities exchange commission decided on taking care that smaller companies are furnished with enough information on how to deal with the compliance requirements.

The range of implementation of the act spreads beyond large corporations, into non-profit organizations as well. Better accounting practices have been recommended for universities. The National Association of College and university business officers or NACUBO brought forth a report named "Consideration of Sarbanes-Oxley guidelines and applicability at Colleges and Universities." This demonstrated how the universities have utilized the act as a way of identifying the areas where they face financial threats. It is not being considered as simply a set of rules which they have to follow as a compulsion. They have decided on applying some best practices from within the act which would prove beneficial to them. If for example a college considers that a whistle blowing policy will help them achieve significant advantages without having to use a lot of resources, they would follow the section 806 of the act. Having colleges to comply with all sections of the act would not work out efficiently, as it would require a lot of finances, which they might not have to spare. Thus it makes more sense for them to select a set of Sarbanes-Oxley best practices to help them out with their reporting structure, governance issues and inside controls. (Implications for Nonprofit,2003)

While the act is mostly directed towards public companies, it affects universities in quite a few ways as well. As per the act, the transactions conducted within the university and the employees would be examined to a greater extent. The integrity of the financial sector of these organizations controlled by state agencies and related services, would improve. The provisions offered by the act would serve as models based on which standards for other non-profit organizations can be developed in the future. It will create a better understanding of the limitations placed on auditors and a deeper scrutiny of the financial and transaction statements presented by the auditors. While the business governance rules do help out universities to good extent in avoiding scandals, generalizing all sections would not help.

Surveys have been conducted to determine the extent to which the Sarbanes-Oxley act should be implemented in universities and colleges. One of the studies revealed that around half of the respondents think that incorporating certain sections of the act would be a good idea. A research carried out by the corporation PricewaterhouseCoopers' named "Taking the Right Patii" brought together the presidents and officers of different universities. They put forth their own ideas regarding the feasibility of having SOX control the governance, risk management issues and internal controls. The results of the study showed how institutions, regardless of having a public or private status, have an auditing department. They have a minimum of one representative who has financial expertise and have their roles listed down. These are used to select external auditors who would present yearly audit reports. Most public corporations already have officers who present reports about the internal control operations to the auditors. However in a situation that an internal control report is required right away, most institutions would be unprepared. The study also revealed how it is more likely for representatives of public institutions to confirm financial statements compared to those in private ones. The status of risk management is fairly strong with close to 50% of public institutions using risk management techniques as compared to around 30% private ones. Incorporating a more comprehensive risk management structure would be financially harder for most non-profit institutions. (Implications for Nonprofit, 2003)

There are several universities which have included the regulations presented by the act. Some of them include Drexel University, Eastern Michigan University, Purdue University, University of Louisville and DePaul University. Drexel can be considered as the first major university which modified their internal laws according to the best practices stated by the Sarbanes-Oxley act. They employed auditors to look into potential risks which could hamper their internal processing. It currently has a COSO-based yearly audit conducted by people trained to understand the current needs. The university of Louisville adhered to the recommendations put forth by NACUBO and applied some new policies on their working structure. Services offered by external auditors received consent from an internal audit committee before being put into action. The head of the team conduction the audits was changed every 7th year. A council to oversee the progress of the compliance was developed in order to maintain a standard (Goins and Giacomino, 2009).

The latest developments with Sarbanes-Oxley include the investigations conducted over the rules of the act. Recent research results declare that considering the benefits obtained, the expenses faced by corporations to keep up with the rules are proving to a lot more than expected. The senior officers of the PCAOB have a lot of control over operations of American companies in the public sector. They gather funds as a fee from these companies based on how strong their assets are. In addition to this, PCAOB places further charges are imposed to make sure that the 404 rule over bookkeeping controls is being complied with. The difficulty of these steps requires extensive investigations over the smallest of issues. . "A glimmer of hope lies in the fact that Sarbox, drafted in the political panic following the Enron and Worldcom accounting scandals, failed to include a "severability clause." Thus if PCAOB is struck down as unconstitutional, all of Sarbanes-Oxley could come crashing down with it."(Freeman, 2009). "There is evidence that many educational institutions are already voluntarily complying with SOX principles and NACUBO recommendations because they believe it will benefit them. Smith provides some evidence of attitudes of business officers toward implementation of SOX at universities and colleges, and NACUBO's survey documents the degree of implementation up to 2004." (Goins and Giacomino,2009).

According to a study conducted by the SEC in 2003, a medium sized company could have most of their internal control operations done at around $91k yearly. Studies in more recent years have revealed this number to rise pretty steeply, choking start-up companies. The latest results have shown the section 404 to cost average sized companies over $2 million every year, just to follow all parts of its compliance rules. It revealed how the its effect the smaller organizations can be over 7 times as compared to those which are larger in assets. When surveyed on the benefits received, less than 20% of the companies said that the good points make up for the amount spend by them. There are a greater number of people who consider the act to have a bad effect on their company's efficiency. It has decreased the time efficiency of the financial reporting operations. The SEC survey revealed how the section 404 of the Sabanes-Oxley Act has directed a lot of companies to transfer to the private sector. The act has supposedly resulted in U.S. based organizations to cut down the investments in research based activities as compared to Canadian and British companies. It does not support innovation as by making officers more liable to committing crime, they are forced to rethink before making any investment so that it does not prove harmful in the future. The level of difficulty at which the firms operate and how much they rely on specific expertise, decide the possible risks which can show up while presenting the financial statements. (Freeman,2009).