The Sarbanes–Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act of 2002, and simply as SOX, Sarbanes-Oxley (named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley), came as a result of several public scandals over the accounting practices of major U.S. companies including Enron, WorldCom, Tyco International, and Peregrine Systems. The Act affects U.S. publicly held companies, foreign companies registered with the SEC, and the accounting firms that audit them. (Horngren & Harrison & Oliver (2009, 2008). Accounting. Pearson Education, Eight Edition)
Analyze the new or enhanced standards for all U.S. public company boards, management, and public accounting firms that the SOX required.
The Sarbanes-Oxley Act includes regulations that affect not only corporate accounting and reporting practices, but also how corporate boards, executives, and outside auditing firms interact. Sarbanes-Oxley aims to enhance corporate governance and strengthen corporate accountability. It does that by formalizing and strengthening internal checks and balances within corporations. Instituting various new levels of control and sign-off designed to ensure that financial reporting exercises full disclosure and corporate governance is transacted with full transparency. (http://www.sox-online.com/basics.html)
Examine why the new enhanced standards are necessary.
The Sarbanes-Oxley Act created new standards for corporate accountability as well as new penalties for acts of wrongdoing. It changes how corporate boards and executives must interact with each other and with corporate auditors. It removes the defense of "I wasn't aware of financial issues" from CEOs and CFOs, holding them accountable for the accuracy of financial statements. (http://www.sox-online.com/basics.html) The CEO and CFO are now required to unequivocally take ownership for their financial statements under Section 302, which was not the case prior to SOX. (http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act)
Evaluate the benefits and costs of the SOX.
Sarbanes Oxley Act provides a number of long term benefits. Investor’s confidence is increased as Sarbanes Oxley Act ensures reliable financial reporting. Sarbanes Oxley act has significant impact in the corporate governance. Companies are no longer able to manipulate inventories or stocks of products or sales as there is a real time reporting system in place. Sarbanes Oxley Act nurtures an ethical culture as the act enforces top management be transparent and employees responsible for their acts and also by ensuring protection to whistle blowers in the firm. (http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act)
The Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs. These costs have continued to decline relative to revenues since 2004. The 2007 study indicated that, for 168 companies with average revenues of $4.7 billion, the average compliance costs were $1.7 million (0.036% of revenue). The 2006 study indicated that, for 200 companies with average revenues of $6.8 billion, the average compliance costs were $2.9 million (0.043% of revenue), down 23% from 2005. (http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act)
Compare and contrast the reactions of companies and companies’ executives to the SOX and its requirements.
Congressman Ron Paul and others such as former Arkansas governor Mike Huckabee have contended that SOX was an unnecessary and costly government intrusion into corporate