Question

How did the sarbanes-oxley act impact corporations financial reports?

Answer 1

The Sarbanes-Oxlet act (SOX) was primarily enacted following the Enron and other scandals. It basically sought to remove the compliance and audit gaps that may lead to the same kind or scandals in future. This is considering the fact that these scandals lead to losses worth trillion dollars to the investors and the general public and hurts the image of corporates and government identically.

The SOX was enacted for US corporations and sought to tighten accounting, financial reporting and audit practices to strengthen the basic foundations that may lead to humongous consequences. However the basic difference was that this act only was implemented to the corporations and management alike.

The following were the major points which impacted corporations financial reports in a way that set a benchmark for all future compliances:

1. Public Company Accounting Oversight Board (PCAOB)

   This was basically set up to oversee the funtioning of independent audit firms which do compliance and financial audit for the specific companies. It was taken care that there the auditors be registered and there be specific set and defined processes which should be followed. All systems for process, compliance, quality control etc. were put in place to prevent any further slippage and mistake.

2. Auditor Independence

   This takes care of the utmost factor of independence of the audit firms. It seeks to minimize the conflict of interest that may arise in the event that a particular audit firm auditing the company is already providing some said non-audit service to the company. This is taken care of by this provision.

3. Corporate Responsibility
   This was basically teh fact that senior executives of the firm would not be held responsible for accuracy and completeness of all corporate financial reports. It defines how the company management would interact with the external auditors for the purpose of accuracy and validity of the reports. Also penalties pertaining to non-compliance are mentioned.
   
4. Enhanced Financial Disclosures

   This basically takes care of micro-reporting of sorts. There are enhanced reporting of all financial transactions i.e. off-balance-sheet transactions, any stock transactions of corporate management etc. The point also mandates strict internal controls for disclosures, and accuracy of the financial reports. It specifies audit controls and enhanced reviews by the SEC or its agents.

5. Analyst Conflicts of Interest

   This includes measures related to help and restore investor confidence. This paves way for investor confidence in reporting of securities analyst. This also mandates disclosures of conflict of interests is any and code of conduct for these analysts.

6. Commission Resources and Authority
   
   This while takes similar care as the point 5. It also defines the power to SEC to bar professionals and conditions under which a advisor, broker or dealer can be barred from practicing.
   
7. Studies and Reports

   This consists of sections which require the SEC with the Comptroller General to report specific findings. These reports include the effect of credit rating agencies, whether there are any securities violations, and whether any investment banks assist the companeis to manipulate financials. ALso reporting related to effects of consolidation of public accounting firms are provided in this.

8. Corporate and Criminal Fraud Accountability

   This seeks to provide whistle-blower protection for any information that they reveal. It mandates penalties i.e. criminal in sense, for alteration and manipulation of financial records.

9. White Collar Crime Penalty Enhancement

   This is expecially a step ahead of point 8 in terms of the penalties. It recommends stronger and stricter sentences and implies that any failure to properly certify financial reports is a crimilThis section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.

10. Corporate Tax Returns

    This states that the company tax return should be signed by the Chief Executive Officer.

11. Corporate Fraud Accountability

    This is again in line with point 8 and 9. It revises the guidelines for sentencing in case of any criminal offense relating to financil report manipulation. The SEC here gets special provisions to freeze transactions or payments that seem/deem to be very "large" or of the "unusual"kind.