Sarbanes-Oxley Act is the response to the malicious accounting practices that had been going on before. It seeks to restore the public's confidence in the corporate governance ethics and financial reporting guidelines.
If the public's trust has been shattered it is an issue of concern especially as all along there had been as assurance of sound accounting and auditing practices. The Sarbanes-Oxley legislation establishes new standards for all US public company boards, management and public accounting firms.
Some of the main provisions of the Act are:
A new agency, the Public Company Accounting Oversight Board, shall monitor the role of auditors of public companies.
Henceforth, CEOs and CFOs shall certify that the financial reports are true and fair.
Stringent measures to establish greater auditor independence including bans on certain types of assignments and prior certification by the company's Audit Committee of all other non-audit work
Listed companies should have fully independent audit committees to review auditor-client interaction
Significantly longer jail sentences and heftier fines for corporate executives guilty of willful misstatements
Protection to employees providing information to OSHA within 90 days, to claim reinstatement, compensatory damages, back pay and benefits and reasonable costs.
The professional regulatory bodies have also embarked on a thorough exercise of revamping the auditing guidelines and acceptable accounting practices. It is not as if the auditors colluded with the perpetrators. But, insufficient mandate for making disclosures of certain types of transactions could have led to slippages despite the diligence and due care of the auditors. A famous judge commented," Auditors are like watchdogs; they are not bloodhounds".
The disclosure requirements mainly equip the auditors to report whether there have been shady or questionable transactions.
Therefore, disclosures are an integral part of the financial statements. They provide additional information on transactions that could have significant bearing on the understanding of the information contained in the statements. Disclosures also predicate that chief executives of corporate bodies apply the GAAP in preparing financial statements.
Common forms of disclosures are:
Additional information on account balances in the financial statements, primarily with respect to transactions with top management or their relatives
Supplementary tables and schedules
Financial impact of certain decisions
The main agencies that frame the disclosure requirements are the FASB, SEC and the IASB.
Sarbanes Oxley Act Definition
In 2002 the Sarbanes Oxley Act was passed into federal law after the American nation was shocked by scandals that rocked large businesses from Enron, WorldCom, and Adelphia to name a few. These scandals all related to businesses and firms using insider trading to get ahead resulting in the loss of share value to many individual investors and drastically reducing the American's faith in trading and investing in the stock market in general, but most noticeably in the securities market as they were all centered on businesses there. If you remember the Enron scandal in 2002 you will remember the amount of press coverage it received and how many top businessmen ended up in jail.
The Sarbanes Oxley Act, also known as the "Public Company Accounting Reform and Investor Protection Act of 2002" was passed to place more restrictions and institute forced reform on Us companies that were involved in Us bonds that were publicly owned. Sarbanes Oxley Act mainly details how businesses including accounting firms and other bond management firms that act with public shares, will be criminally prosecuted if hedge funding or insider trading is exposed within their organization and places stronger regulations on the way they are able to carry out their business tactics when trading.
However, some people do not agree with the many different sections of the Sarbanes Oxley Act, as some of it they say places too much regulation on firms and trading business in the US and therefore lessens America's stance in the international marketing claiming that the Sarbanes Oxley act went overboard in defining what is permissible and what is not when conducting trade. These opponents claim that the government infringed too much on business rights while trying to protect individual rights and the Sarbanes Oxley act actually hurts the securities market efforts to gain a strong standing in America today as it limits too many activities that are needed to be successful in the international trade market.
Recent stats show that Sarbanes Oxley actually caused many firms to withdraw from public stock trading, which hurts the value of the share market, because they decided that it would be too costly to their businesses to even attempt to comply with the new regulations and standards that Sarbanes Oxley act imposed on them. In this way the Sarbanes Oxley act actually hurt the American public even more as the more businesses step out of trading, the lower the overall stock market.
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