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 Dutillieux, Francis, and Willekens (2016) article, ”The Spillover of SOX on Earnings Quality in Non-US Jurisdictions (Links to an external site.)” discuss what earnings quality is and how the concern over that quality may have led to the enactment of SOX. How does SOX (a piece of U.S. Legislation) impact companies in other countries?  

Answer 1

Answer:- As per the given information, Sarbanes-Oxley (SOX) was introduced in 2002 by the united states congress to fight corporate financial statements fraud. 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.

• An interesting point from the article is that many companies chose to go dark post the implementation of SOX.
• They deregistered their common stock and suspended their SEC operations and hence it was established that such firms are close to financial distress.
• This showed the impact of SOX on such companies. Such companies had greater accounting problems and weaker board governance.

Modification of the internal control attestation in the course of implementation :

1. Under SOX the public companies were required to obtain audit firm attestation in regard to there internal control system.
2. Audit firms were required to be paid for the reviews which many regarded as “unjustified reviews of companies” policies, procedures, the system for prevention of theft & fraud as it was was costly initially, time-consuming, detailed.
3. It leads to widespread & sufficiently loud complaints that PCAOB had to make a significant change in the Sox Section 404 implementation.
4. The firms which are subject to sec 404, in 2007 the PCAOB adopted Audit Standard 5, which 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
5. The act proved and survived intact. moreover, the significant evidence produced by the internal control 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 to sec 404, the trustworthiness has increased to a great extent.