Sarbanes-Oxley Act effectiveness in minimizing corporate fraud and protecting investors

Sarbanes-Oxley Act

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 responsibilities include registering the public accounting firms. The board is responsible for the licensing of the firms that provide audit services.

Secondly, it is charged with the mandate to establish the auditing quality control, the ethics and other related standards for the public audit firms. The PCAOB has authority to set the specific standards that govern how the auditors carry out their responsibilities. It has significantly impacted the conduct of the auditing firms and the more the professional conduct and ethics of the individuals who do the audit works (Welytok, 2006).

Moreover, the board is mandated to conduct inspections and investigations on the proceedings of the registered accounts firms as well as the disciplinary practices of the firms (Fletcher & Plette, 2008). The board ensures that these organizations are compliant to the registration regulations and it carries out punitive measures on the firms that break these requirements. PCAOB has the significant responsibility to inspect the process of audit so as to provide quality outcomes. The inspections are thorough, looking for any loopholes that may show material misstatement. This has effectively impacted the quality of the audit firms and their quality of services, improving the personal skills of the professionals in this field.

The last responsibility is that of enforcing the compliance standards of the firms and professionals to the Sarbanes-Oxley act. The PCAOB's staff actively investigates the firms for any inconstancies in adhering to the act. Sanctions are imposed on the individuals and the firms that violate the laws and regulations of the profession. The powers of the board also authorize them it to impose fines on the individual auditors and firm (Holt, 2008). Moreover, they can also revoke the registration license of the firm, once the registration is revoked, the company cannot not carry out audits. This has the impact of eliminating the undesirable audit practices in the field. Moreover, it enhances sanctity in the auditing firms and the profession at large.

The establishment of the PCAOB has therefore significantly influenced the corporate governance. Sarbanes-oxley has expansively crated more responsibilities for the audit committees (Fletcher & Plette, 2008). PCAOB has a big impact on the profession of accounting and the firms that conduct audits.

Initially, the introduction of the Sarbanes-Oxley act was viewed as a punitive measure and too expensive act to implement. Many individuals thought that it would spell the fall of the United Sates' of America market. They thought that it would negatively impact businesses,. However, it has turned out to be the best regulation ever enacted. The credit crisis and the recession crisis are among the effects of lack of regulations in the industry of banking.