The Sarbanes Oxley Act is a law in the United States, enacted in 2002 to guide the landscape of financial reporting for professionals in finance related fields. The law derives its name from Paul Sarbanes, an American senator and Michael Oxley, a representative. The act was signed into law in the year 2002 by the United States president and it aims to review the legislative audit requirements. The 2002 Sarbanes Oxley's Act seeks top protect the investors by improving reliability and accuracy of the corporate disclosures.
This legislation popularly referred to as SOX, aims to amend wire fraud and mail infraction with stricter punishments and provides for prison sentence of even 20 years and imposing heavy fines on any person who willfully destroys or alters the documents or records with an intention of obstructing and stifling investigation. It is important to note that most off the Sarbanes Oxley Act provisions majorly target financial records but do not confine it to that. It is possible to submit discovery requests to the information technology department. A request seeking access to all the email communications falls under the command of Sarbanes Oxley Act (Green, 2004).
Sarbanes Oxley Act is a Law for Corporate Governance
Sarbanes Oxley Act is generally a law for corporate governance established after a raft of mega / high profile financial scandals witnessed in the United States such as the WorldCom and Enron in order to overhaul the entire corporate financial reporting by enhancing its reliability and accuracy. There is an immense improvement on the standards of accountability courtesy of Sarbanes and Oxley by ensuring that the high-ranking officers of company such as the chief executive officers account for all the financial results of a company since the Sarbanes Oxley Act demands they sign statement s to such an effect.
The Sarbanes Oxley Act eliminates the "aw shucks" excuse and defense strategy used by senior executive officers engaged in the previous financial scandals. The blatant denials by these officers, characterized the pre-SOX scandals. The chief executives involved in the scandals feigned ignorance and severally claimed that they were unaware of the financial scandals taking place under their watch and characterized by distortion of the firms' financial reporting. It is therefore important to note that the urge to curb high-level financial scandals that informs the enactment of the Sarbanes Oxley Act. The board room failures negligence of board members, conspiring to swindle the public funds or failing to exercise responsibility (Brazel, 2010).
One of the manifestations of the impact of Sarbanes Oxley Act is the fact the senior executives, chief executive officers and boards of directors currently care about systems and software that can facilitate compliance with SOX requirements. Regulatory compliance to the Sarbanes and Oxley provides a baseline for ethical and transparent corporate governance (Green, 2004).
The Core Aspect of the Sarbanes Oxley Act
Internal controls, which forms a core aspect of the Sarbanes Oxley Act is a process designed to offer reasonable assurances in relation to the achievement of firm's objectives. The internal controls fall under various categories such as detective or preventive and the requisite processes necessary for implementing control may be manual or automated. The preventive controls work in a manner that discourages irregularities and errors from occurring. Detective controls for example, work in a manner that finds out irregularities and errors before their occurrence hence contributing towards averting the occurrence of irregularities, errors that amounts to a financial crime. It is there fore important to note that the internal controls envisioned by the SOX is a mechanism that can assist firms operate above board and limit the risk of errors and irregularities that are prone to occur in firms with no internal control mechanisms ( Brazel ,2010).
Quick retrieval of data is one of the key requirements of the Sarbanes Oxley Act. This requirement is advantageous to the firm since it enables the IT department to be able to retrieve certain documents, within a short notice especially in cases a potential battle. The internal control provisions or section 404 of the Sarbanes Oxley Act has it that publicly traded companies must institute controls and policies to document, secure and process materials information concerning the company's financial results (Green, 2004).
Section 409 of the of Sarbanes Oxley Act is a provision for improved financial disclosure which requires the companies to disclose information regarding material alterations in its financial operations and conditions almost in a real time basis. Sections 902 of the Sarbanes Oxley Act on deals with conspiracy and attempts to engage in unethical financial conducts. The data retention procedures and policies are some of the key features of SOX. The SOX demands that organizations must put in place strict records retention procedures and policies even though it does not specify the format for storing data.
The SOX however, demands of the corporate officers that they institute certain internal controls regarding information in order to ensure quick access, completeness and correctness. The Sarbanes Oxley Act however mentions accounting firms specifically for some of its provisions. The Sarbanes Oxley Act for instance demands that the accounting firms which audit the companies that trade publicly to store the related audit information and documents for a period of seven years and above. Another key aspect of the Sarbanes Oxley Act is the fact it outlines the penalties or charges that culprits stand to face for the offences emanating from non-compliance with Sarbanes and Oxley Act (Green, 2004).
Auditor independence is another provision of the SOX consisting of nine categories, which outlines the standards in regards to the independence of external auditors with an aim of limiting the conflict of interest that may arise in the course of discharging professional duties. This provision highlights the approval requirements for a new auditor, auditor reporting requirements and the rotation of audit partners. The Sarbanes Oxley Act equally limits auditing companies from offering non-audit services such as consultation to the same customer (Brazel, 2010).
There are provisions in the Sarbanes Oxley Act which offer guidelines aimed at restoring the confidence of investors, such as the analyst conflict of interests, which proposes measures, aimed at restoring the investor confidence in securities analysts reporting. This provision highlights the parameters of codes of conduct for the financial service securities analysts and tasks them with the disclosing any conflict of interest that they are able to know. The commission authority and resources is another provision providing crucial practices of restoring investor confidence by the securities analysts.
This provision stipulates the circumstances under which barring a professional in the field of securities, such as advisors, dealers and brokers from practicing. The Sarbanes Oxley Act provides for the establishment of an accounting oversight board for a public company, corporate responsibility and the independence of auditors and improved financial disclosure. The act tightens the standards of accountability for officers, directors, auditors, legal counsel and security analysts (Green, 2004).
The Sarbanes and Oxley Act like any other law enlists debate thereby earning support or opposition from interested parties depending on the costs and benefits. The supporters of Sarbanes Oxley Act hold that the act is instrumental in restoration of public confidence in United States capital market through the reinforcing corporate accounting controls. This in favor of the act argue that the Sarbanes and Oxley Act is good for the American financial markets since it boosts the confidence of investors and other fund managers due to the veracity of financial statements from the corporate ( Brazel ,2010).
The Opponents of the Sarbanes Oxley Act
The critics or opponents of the Sarbanes Oxley Act claim that it reduces the competitive edge of United States' international competitive edge against the foreign counterparts dealing in financial services since Sarbanes Oxley Act introduces complex regulatory mechanism into America's financial markets. The is critics of the SOX hold that the Act amounts to governments a costly and unnecessary interference in the corporate management and does more harm than good to competitive edge of American corporations. According to the Critics, the SOX damage the United States capital markets. The new regulations and laws arising from SOX tend to damage the spirit of entrepreneurship in the US and cripple the creation of new/fresh public companies as it also harms the venture capital investments (Green, 2004).
There are certain aspects of SOX that are bound to change in future in terms of amending certain provisions of the Sarbanes Oxley Act in order to incorporate the dynamics in financial sectors. The amendments may seek to strengthen the compliance requirements .some of the changes include revising the current penalties to stricter ones in order to discourage chief executive officers and other high ranking officials within the corporate financial cycles from engaging in dubious activities that are contrary to professional and ethical conducts. The future will also witness a rise in creation of software that can facilitate compliance with the Sarbanes and Oxley Act (Brazel, 2010).
In conclusion, the corporate responsibility SOX provisions have eight sections that compel the chief executive officers of a firm or company to take individual responsibility in relation to completeness and accuracy of a firm's corporate financial report. The corporate responsibility defines the relations of corporate audit committees and the external auditors. It equally defines the responsibility of the corporate officers in order to ensure validity and accuracy of financial reports. The provision highlights the specific restrictions on the activities of corporate officers and describes the circumstances warranting forfeitures of benefits.