Evaluating the effectiveness of the Sarbanes-Oxley Act
The Public Company Accounting Reform (PCAR) and Investor Protection Act (IPA) was established in mid-2002 by the congress with the emergence of unceremonious scandals in accounting practice that resulted in firms going bankrupt and losing huge stocks in the stock market (Prentice & Bredeson, 2010). This act is what is referred to as Sarbanes-Oxley act of 2002. The act also led to the establishment of the Public Company Accounting Oversight Board (PCAOB), whose function is to oversee the accounting practice industry.
The Sarbanes-Oxley act was established with intend of preventing the clash of interest which resulted in fraud. The auditors are prohibited from consulting for the auditing clients that engage in fraud (Welytok, 2006). It also gives the people who blow whistle on the individuals practicing these activities security of their jobs. Moreover, it banned the issuing of loans to the company executives. Sarbanes-Oxley states that the top executives should certify the corporate accounts personally. The section 404 holds the managers accountable for upholding "ample internal control procedures and structures for the financial reporting" (Prentice & Bredeson, 2010). The act mandates the companies to openly disclose weaknesses in the material provided. Once the auditors recognize traces of fraudulent activities, the company is legally responsible to criminal penalties.
The Sarbanes act works effectively towards combating corporate fraud and also protecting the investors from these fraudulent practices. All corporate businesses, both the domestic and foreign companies that are registered in the security exchange act of 1934 are subjected to the Sarbanes-Oxley act (Prentice & Bredeson, 2010). Foreign public firms of accounting also conform to the act if they carry out audits for corporate registered under the act. Its major achievement in helping the corporate world against unwarranted loses is that of raising the financial standards in the corporate governance, analysis of security and performance of audit work. It has made the directors plus officers in charge of these corporations to be answerable for the financial status of these organizations.
The key requirement that every public corporation should have a committee for auditing has also effectively helped manage these organizations. The board of directors has the responsibility to appoint an independent and competed audit team. The team is charged with the responsibilities of inspecting, regulating and controlling the activities of the firm (Welytok, 2006). The auditors produce report of what its assessment has produced hence providing a reference base for decision making.
Moreover, there is a requirement that chief executive officers and managers of firms must certify that the firm's financial disclosure complies with the act, and represents the company's actual condition. This prevents the directors of the company from issuing misleading and falsified financial statements so as to obtain personal gains (Bauer, 2009). The act states it is a crime against the federal law for a company or organization to manipulate or pressure an auditor into falsifying financial reports. This act has hence effectively helped in protecting the corporate unit from the fraud activities of the very selfish and manipulative individuals and organizations.
Another fundamental way in which the act has successfully helped in protecting the business world is by subjecting securities analysts to much strict rules as a result of conflicting interests. It further separated the investment banking from the securities analysis for most of the financial-service organizations. This helps protect the corporate borrowing of loans and investing abilities. The act has brought tremendous changes in the federal securities laws. It also is effective as a result of the strict and strong belief and adherence to the corporate codes of ethics that it upholds.
However, there is a major setback to the act. The managerial, technological and legal costs of complying with the act are way too huge even for the small organizations (Bauer, 2009). These costs have hence de-motivated some of the companies to withdraw their shares from major exchanges and decide to go private. In actual sense, the costs for small companies after avoiding compliance are lower. Hence to improve, there is need to revise these costs incurred with respect to the compliance.
The public accounting oversight board (PCAOB) is a non-profit organization that was established by the 2002 Sarbanes-Oxley act (Fletcher & Plette, 2008). Its major responsibility is to oversee the accounting professionals who give independent audits for public organizations. Its other key…