Question

Discuss the importance of the Sarbanes-Oxley Act. In your own words

Answer 1

The Sarbanes–Oxley Act of 2002is also known as the "Public Company Accounting Reform and Investor Protection Act" and "Corporate and Auditing Accountability, Responsibility, and Transparency Act".

And  more commonly it is called Sarbanes Oxley (SOX) is a federal law from US that set novel and expanded requirements for all Public companies, management and public accounting firms in US.

The Sarbanes-Oxley Act was passed in response to widespread corporate fraud and failures that had occurred in the recent pasts.

Importance of the act:

This Act implemented certain other  new rules for corporations, like setting up new auditor standards in order to reduce disputes over interest and transferring responsibility for the complete and most accurate handling of financial reports.

One direct  and most important effect of the Sarbanes-Oxley Act on corporate governance is the empowerment  of the organizational audit committees.

The Sarbanes-Oxley Act is highly significant in bringing changes in the management's responsibility towards financial reporting significantly. This act usually requires  that top managers personally certify the accuracy of organizational financial reports. According to this act, If a top manager willfully commits any false certification, he is supposed to face an imprisonment between 10 to 20 years.

The Sarbanes-Oxley Act also  encourages and promotes the disclosure requirements of the organization. Public companies are needed to disclose any material off-balance sheet arrangements, such as operating leases and special purposes entities. They are also supposed to disclose any pro forma statements and how they would look under the generally accepted accounting principles (GAAP)

This act imposes harsher punishment for obstructing securities fraud, mail fraud, etc. The maximum sentence term for securities fraud has  been extended to 25 years, and the maximum imprisonment  time for the obstruction of justice increased to 20 years. Hence there are chances of reducing fraud mails and securities.

It requires public companies to perform extensive internal control tests and include an internal control report with their annual audits. Testing and documenting manual and automated controls in financial reporting consumes enormous effort and involvement of both external accountants and well experienced IT professionals.

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