Question

Discussion question - Some individuals criticize Sarbanes-Oxley as simply a "knee-jerk reaction" to accounting scandals or an opportunity for politicians to use these events to make it appear they were "fixing" the accounting industry. Do you agree with this statement or do you think SOX is effective and was necessary? Provide your reasoning.

Answer 1

Sarbanes- Oxley act or simply known as SOX is a federal law that made numerous reforms to corporate financial reporting and accounting profession. It requires corporate executives to certify the accuracy of their company's financial statements, maintain and assess internal control and check the presence of any wrong & false practice, misleading financial data or any fraud in the organization. It also establish an oversight board (Public Company Accounting Oversight Board) to monitor the corporate behaviour, to protect investors by improving the accuracy and reliability of corporate disclosures, by strengthening the governance rules, by increasing the penalties for malfeasance, strengthening the need of whistle blower protection and compliance monitoring.

The large number of corporate scandals prominently Enron and Worldcom lead to set of the law. Although it also has it's critics- some of them noted down that the politicians uses these events to make it appear they we're fixing the accounting industry or they withhold the funding necessary to bring these reforms into motion. While others, oppose the act as it increases the corporate cost and reduces the competitiveness.

But this act strengthen the Independency and financial literacy of the board of the company. It ensures adequate internal control by the managers and auditors have to attest these controls and disclose the deficiency. The board was created to develop accounting standards and train auditors for assessing the controls. It issues rilules and regulations related to accounting and auditing. Before SOX the accounts were self regulated. There is no doubt that SOX compliances are costly but the survey also found that most companies believe that cost out weigh the benefits. Thus making it sure that it combats the fraud, improve the reliability of financial reporting and restore the investor confidence.