Introduction

From the onset, it would be prudent to note that the Sarbanes-Oxley Act remains a rather instrumental law in efforts to reign in corporate fraud and further enhance reliability in the realm of financial reporting. The said act was passed in the year 2002. This text concerns itself with not only the significance of this particular piece of legislation, but also the reason as to why it was passed. Amongst other things, the paper will also consider how knowledge of the various provisions of the act would enable one to promote corporate governance in an organization.

Discussion

Why the Sarbanes-Oxley Act was Passed

Fletcher and Plette (2008) make an observation to the effect that this particular act was necessitated by the numerous financial scandals that appeared commonplace following our march into the 21st century. Some of the most prominent scandals in this case involved firms that were publicly traded, including but not limited to; WorldCom, Tyco International PLC, and Enron Corporation (Wheelen, Hunger, Hoffman, and Bamford, 2018). Some of the said companies were focused on either ignoring or bending the regulations that had in the past been formulated to ensure that the interests of shareholders were secured (Wheelen, Hunger, Hoffman, and Bamford, 2018). It is for this reason that as Fletcher and Plette (2008) further indicate, the said scandals had a massive negative impact on investor confidence especially in relation to the extent to which they could rely on corporate financial statements. As a consequence, there were calls from diverse quarters on the need to revamp the regulatory standards in place at the time. This is more so the case that to some, the existing standards had not been overhauled for decades, and were hence largely ineffective in combating modern-day corporate fraud. It would be instrumental to note that it was also at around this time that technology was gaining root in the realm of business especially following the advent of the internet. To gain a sneak preview of the prevailing situation prior to the enactment of the passing of the Sarbanes-Oxley Act, there would be need to briefly highlight some of the scandals alluded to above in greater detail.

To begin with, when it comes to the Enron scandal, it is important to note that according to Kieff and Paredes (2010), this was a rather brazen accounting scandal. Indeed, as the authors further indicate, alongside Tyco and WorldCom frauds, it could easily be one of the most complex scandals of its kind in history. In essence, this particular scandal which essentially surfaced in the year 2001 involved massive accounting fraud and corporate corruption. As Kieff and Paredes (2010) observe, the company managed to make extensive use of accounting practices that were largely off-the-books and deploy fake holdings in a bid to fool regulators. Further, the company also managed to ensure that creditors and investors did not get to know of its worsening debt situation. To accomplish this, it utilized special purpose entities (SPEs) as well as special purpose vehicles (SPVs). According to Kieff and Paredes (2010), Enrons troubles were further deepened by embezzlement from its top executives who also actively participated in the misrepresentation of the companys earnings reports. The company had significant connections to the nations political establishment which meant that it could largely operate without being subjected to significant government scrutiny. It is important to note that at the peak of its performance, the companys stock had reached a high of $90.75 (Kieff and Paredes, 2010). However, at the point of collapse, the companys stock had loss massive value trading at only $0.26 (Kieff and Paredes, 2010). Thus, some of those who were most impacted by Enrons fall are inclusive of its employees, investors, as well as creditors.

The Tyco scandal, which has famously come to be referred to as the 2002 Tyco scandal, involved massive embezzlement of company funds by two top company executives its CEO and CFO (Kieff and Paredes, 2010). In essence, the two engaged in a fraudulent scheme that ended up costing the company hundreds of millions of dollars. As Kieff and Paredes (2010) indicate, in addition to expense accounts falsification, the said executives also took unauthorized bonuses and partook in stock fraud. Also roped in into this scheme was the companys general counsel who also took part in Tyco financial records falsification. It is important to note that although Tyco continued its operations following the discovery of this racketeering scheme, the top executives found to have taken part in the same were replaced and charged.

In the year 2002, yet another company went bankrupt as a result of accounting fraud. The said scandal involved one of the biggest telecommunication companies in the U.S. at the time, i.e. WorldCom. It is important to note that as Kieff and Paredes (2010) point out, news that WorldCom had cooked its books came on the heels of the Enron and Tyco frauds, which had rocked the financial markets the scale ofthe WorldCom fraud put even them in the shade (211). WorldCom had engaged in well-coordinated efforts to falsify its financial statements with the intention of significantly enhancing its position in relation to profit-and-loss. This it managed to accomplish by falsifying data crucial accounting books and records including the balance sheet, income statement, as well as Form 10-K filing. The companys top executives deployed a number of strategies to hoodwink both investors and the relevant regulatory agencies. The said strategies were inclusive of, but they were not limited to, having payments made for the utilization of other companies communication networks as capital expenditures...…are disclosed. This is more so the case in seeking to ensure that all financial dealings are transparent. It is important to note that as Fletcher and Plette (2008) point out, some of the said obligations as well as financial liabilities have in the past been left out of the general balance sheet as they are deemed off-balance sheet.

Third, I would seek to ensure that to further promote the accuracy of financial statements, I see to it that internal controls are created by auditors and managers. This would be in efforts to ensure compliance with Section 404 of the act. I would also ensure that the relevant professionals and/or auditors are reminded of their responsibility to disclose concerns with the controls. In further compliance with this section of the act, the evaluation of managers would be signed off by external auditors.

Next, there would also be need to ensure that records are maintained in line with the provisions of the acts section 802. This is particularly the case given that the act indicates the specific communications (both electronic and physical) that must be stored by the company. Thus, deliberate efforts would be made to ensure that the relevant records are neither falsified, nor tampered with.

Criticism

Despite being hailed as a crucial score for corporate governance, there are those who have in the past felt that the Sarbanes-Oxley Act does not live up to expectations. For instance, as has been alluded to earlier on in this discussion, there are some who have argued that the requirement that publicly listed companies engage in internal control tests that are more extensive and ensure that their annual audits are accompanied by an internal control (which is a key requirement under Section 404 of the act) places a huge compliance cost upon companies that are yet to fully automate their systems (Wagner and Dittmar, 2006). This could especially be the case for smaller companies. For instance, in the words of Fletcher and Plette (2008), testing and documenting manual and automated controls in financial reporting requires enormous effort and involvement of not only external accountants but also experienced IT personnel (219).

Conclusion

In the final analysis, it would be prudent to note that the relevance of the Sarbanes-Oxley Act in efforts to reign in corporate fraud cannot be overstated. Passed in the year 2002, this particular act came up with new regulations and standards meant to ensure better financial reports handling. With the more severe penalties imposed for those found to be in violation, the act was effective in efforts to ensure that corporate assets were not misappropriated. Transparency in financial reporting was also significantly enhanced following the further enhancement of disclosure requirements. It should however be noted that there are some who are concerned that this particular act unfairly requires both large and small public…