Accounting Industry Has Been Facing Increasing Amounts

¶ … accounting industry has been facing increasing amounts of scrutiny. This is because a number of high profile scandals (i.e. Enron and World Com) were brought to attention of regulators (based upon the need for increasing oversight in this area). As a result, the Sarbanes-Oxley Act of 2002 was implemented. However, since this law was first enforced, a number of firms are claiming that its restrictions are an added burden (for large multinational corporations). This is creating situations where individuals could still engage in unethical practices. To fully understand what is happening requires looking at potential conflicts. Once this takes place, is when it will highlight the impact of these activities on firms.

The Effect of Sarbanes-Oxley on Financial Statements

The effect of Sarbanes-Oxley on financial statements is that it is forcing firms to provided added disclosures to investors. This occurs with the CEO and CFO certifying under oath that the financial information provided is accurate (under the penalty of perjury). Moreover, there are limitations as to the kinds of loans that officers and directors are able to receive from the firm. The long-term impact is that this financial information is: providing more transparency and it is easier to understand. ("Sarbanes-Oxley Act 2002," 2006) (Frankel, 2012)

However, with the current law in place, there is still the possibility that someone could circumvent these provisions. For example, suppose that the CEO of the company has another corporation they started (by making themselves the majority shareholder). They could use this entity as a way to go around Sarbanes-Oxley. In this case, they could ask the board of directors to loan their firm a certain amount of money. The fact that this is set up as a separate legal entity, means that the company is not breaking the law by engaging in this practice. ("Sarbanes-Oxley Act 2002," 2006) (Frankel, 2012)

Yet at the same time, the CEO knowingly setting this firm up for various purposes is an indication of unethical behavior. As they are fully aware of the different provisions of law and are willing to engage in deception to hide this fact. This is illustrating how Sarbanes-Oxley could encourage unscrupulous executives to become involved in other activities (in order to go around these regulations). When this happens, the law will become ineffective with more people using this approach on a regular basis. ("Sarbanes-Oxley Act 2002," 2006) (Frankel, 2012)

This is highlighting how these kinds of practices will lead to immoral behavior inside a number of corporations. Once this takes place, is when there is the possibility that these provisions will become obsolete by failing to keep up with these changes. This is the point that the underlying amounts of transparency will decrease (while the conflicts of interest will rise). ("Sarbanes-Oxley Act 2002," 2006)

As a result, the main question about the impact of this law is:

How will executives use other tools to circumvent different provisions?