Question

Describe the Sarbanes-Oxley Act. What was it in response to? What are its key requirements? Whatnew governmental body did it establish?

What are the complaints against it? Are they justified?

Answer 1

Sarbanes-Oxley Act was constituted to prevent accounting frauds and ensure correct/accurate financial reporting by the management of public limited companies to protect investor interest. It also increased the accountability of public accounting firms to check and ensure that the financial representations/disclosures made by a company contain all the relevant information and any material misstatement is identified and reported as a part of the financial statements. Additionally, they also need to verify that the management has established a system of internal controls and that these controls are functioning as intended. The overall objective of this act was to reduce the possibility of corporate frauds and scandals through manipulation of financial statements and overriding of internal controls.

SOX was introduced in response to major corporate accounting scandals and financial frauds that took place at large scale corporations such as Enron, Tyco and Worldcomm. Such frauds resulted in loss of investor value and confidence in the conduct of business operations and the management of public limited companies. SOX aimed at improved compliance and corporate governance.

Key requirements of SOX include certification of financial statements by the management of the company (Section 302) to ensure that such statements are accurate and free from any material misrepresentation. An internal control financial report is also required to be attested by the management. Another important requirement of this act is that the management/auditors are required to assess the effectiveness of internal controls over financial reporting (Section 404).

The new governmental body established by SOX is named as "Public Company Accounting Oversight Board" which is also frequently referred to as PCAOB. This body is entrusted with the responsibility of keeping a check on the audit of companies performed by public accounting firms to ensure accurate financial reporting and auditor's independence while carrying out the audit.

The complaints against SOX is the time and cost involved in complying with all the rules and regulations proposed under the act. No, such complaints are not justified. It is because the cost of meeting with the requirements of this act will be outweighed by the benefits that the company will realize as a result of improved compliance and investor confidence in the management and operations (of the company). It is important for the management of any company to protect the interest of various stakeholders at all the times. Compliance with SOX requirements helps a company's management in achieving this goal and establishing investor trust and confidence.