Question

Sarbanes-Oxley Act (SOX) was introduced in 2002 by the United States Congress to fight corporate financial statement fraud. Since its implementation, there have been questions about its effectiveness. After reading the Coats and Srinivasan’s (2014) article, “SOX after Ten Years: A Multidisciplinary Review”, select one item from the article that you found interesting. Explain why you selected it.

Answer 1

The public Company Accounting Reform and Investor Protection Act 2002, is commonly known as SOX or Sarbanes- Oxley Act. It is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International & worldcom which lead to the loss of public trust in accounting & reporting practices.

Under this act new & enhanced standards were established for all U.S public company boards, management, public accounting firms. In the globalised environment of Financial reporting , Auditing and corporate Goverance , this Act has played a very vital & prominent Role.

Modification of the internal control attestation in the course of implementation : Under SOX the public companies were required to obtain audit firm attestation in regard to there internal control system.   It proved to be arguable. Auidit firms were required to be paid for the reviews which many regarded as “unjustified reviews of companies”policies , procedures , system for prevention of theft & fraud as it was was costly initially, time consuming , detailed. It lead to widespread & sufficiently loud complaints that PCAOB had to make a significant change in the Sox Section 404 implementation. Despite of this, the requirement of attestation remains intact for most of the public companies.

Since 2007 neither Congress nor PCAOB has adopted any major changes in the attestation process . Sox did not mandate any change in regard to Companies Control system. A public Company can if it chooses to adopt any IC system after Sox , if it believes that it meets the requirements . Sox Sec 404 aimed to disclose the Internal Control weaknesses , and make Companies to improve their system. However it induced Significant direct costs on Company. Hence because of costs & criticism followed , each SEC, PCAOB, & Congress took Post Sox actions in reponse to it. Deferment of implementation Sec 404 for companies by SEC up to two years after going public , this was extended upto 5 years in 2012 for all the newly largest public companies by Congress.

The firms which are subject to sec 404, in 2007 the PCAOB adopted Audit Standard 5, that lead to the relaxation in the attestation requirements. A unified Audit & attestation process was permitted in 2007 , top down risk based approach to focus on key control risks was implemented, permitted walk through with other methods of IC system testing. After these changes, itlead to the great impact as it proved to be economically meaningful, moreover it lead to the reduction of costs. Hence the acceptance widened to a large exetent.

With the passage of time, desoite of the controversial nature, since its enactment The act proved and survived intact . moreover the significant evidences produced by the internal contro reports as per sec 404 ,the investors & stakeholders are able to make managerial & overall governance improvements. With the improvement in the financial reporting quality that can be attributed with sec 404 , the truistworthiness has increased to a great extent.