Question

Discuss how the Sarbanes-Oxley Act affects a publicly traded corporation.

Answer 1

To understand the effects of the Sarbanes-Oxley Act, we need to know why it was introduced in the first place.

Beginning of 21st saw a large number of corporate scandals unveil. Companies such as Enron, WorldCom, Tyco came to the limelight for all the wrong reasons. The scandals revealed a web of criminal and fraudulent activities taking place in silence. The companies were fined heavily and the officers in default were sent to imprisonment with heavy fines. This also meant that reliance of investors on the existing corporate policies was slowly reducing.  

Therefore to regulate financial reporting process and other practices at public companies SEC introduced the Sarbanes-Oxley Act. Interestingly, some of these provisions also apply to other types of entities, including private companies and not-for-profit organizations.

The effect of the Sarbanes-Oxley Act on public companies are:

1. Audit Committee

Sarbanes-Oxley Act widens the scope of powers of the Audit Committee. The committee is entrusted with additional responsibilities such as relating to accounting services and financial and non-financial audit practices.

2. Managements Responsibility for Reporting

The Sarbanes-Oxley Act has significantly increased management accountability towards the stakeholders. This has made the management alert and diligent in carrying out its functions. Now they cannot simply turn a blind eye towards any suspicious activities happening in the company.

3. Disclosure Requirement.

Increasing the disclosure requirement makes the company more transparent and accountable. In addition to financial items, non-financial items such as agreements should be properly disclosed.

4. Penalty and Punishment

The Sarbanes-Oxley Act imposes harsh penalties and jail terms for obstruction of justice. For Public companies, this limit is even higher compared to other entities.

5.Public Company Accounting Oversight Board,

The Sarbanes-Oxley Act requires every company to have an oversight board. This creates a standard procedure for the accountants and it significantly reduces the conflict of interest in the workplace.

6.Internal control

The Sarbanes-Oxley Act has significantly increased the extent of the internal audit procedure and reporting procedure, This has made the companies to adopt an efficient, centralized and automated system for accounting and reporting.