The Sarbanes-Oxley Act of 2002

In the wake of the financial s brush offdals that struck study corporations such as Enron, WorldCom and Tyco International, the Sarbanes-Oxley lay out of 2002 was enacted to protect investors by improving the truth and reliability of merged divine revelations , made pursuant to the securities laws. (P. L. 107-204, 116 Stat. 45) It aims to create new and kindle previously existing standards and practices for the boards of all state-supportedly held companies as well as management and open chronicle firms in the get together States, delineating and clarifying rights and responsibilities with regards to auditing and melodic line and emphasizing such points as auditor independence, corporate governance and responsibility and assessment of internal controls.Specifically, the Act stresses upon a more exhaustive disclosure of financial transactions as reporting requirements of companies based in the United States now need to be more thorough and more critical, and thusly more c ostly to implement. As such, this comes as a heavy clog to smaller companies who have to skin with the high costs imposed on them to complete their assessments, effectively forcing many of these small businessess to do away with globe ownership, which in turn reduces valu equal entrepreneurial activity. Ribstein & Butler, 2006, p. 101) The Sarbanes-Oxley Act, known in ripe as the Public Company Accounting Reform and Investor Protection Act, was enacted June 30, 2002 with the sponsorships of Maryland Senator Paul Sarbanes and Ohio 4th District Representative Michael Oxley.The Act has 11 titles dealing with auditor independence, individual responsibility of senior executives for the accuracy and completeness of corporate financial reports, and deepen reporting requirements for financial transactions. (P. L. 107-204, 116 Stat. 45, Titles II, III, IV) It too includes measures and practices designed to dish restore investor confidence in securities analysts, as well as indicating violations and limited criminal penalties for fraud by manipulation of financial records or some other interference with investigations. (P. L. 107-204, 116 Stat. 745, Titles VIII, IX, XI) In its establishment, the Act created the Public Company Accounting relapse Board (PCAOB) to regulate and discipline accounting firms as auditors of public companies. It also mandates the Securities and Exchange Commission (SEC) to implement rulings on requirements in compliance with the Act. P. L. 107-204, 116 Stat. 745, Titles I, VI, VII) In his signing statement, President George W. Bush claims the Sarbanes-Oxley Act the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt. He stressed that it ushers in a new age of integrity and responsibility in corporate America where dishonest leading will be caught and penalized accordingly, a reference to the major corporate and accounting scandals that affected many large corporations during the 90s a nd well into the new millenium, shattering public confidence in the nations securities markets. Office of the Press Secretary, 2002) Particularly enraging accounts that led to the presentation of the Act are the scandals that involved Enron, WorldCom and Tyco International, where conflicts of interest, unusual and unreasonably justified banking practices, and problems in incentive compensation activities revealed massive fraud on the part of both the companies and their accounting firms, resulting in massive market downturns. (Patsuris, 2002)The Act combats such unscrupulous activities by emphasizing corporate controls and enhanced financial reporting to allege credibility. Details of off-balance sheet transactions, pro-forma figures and stock transactions of corporate officers essential be reported. To assure the accuracy of financial reports and disclosures, management assessment of internal controls must be thoroughly performed. Timely periodic reporting of material changes in financial condition is required, as well as specified enhanced reviews by the SEC of such corporate reports. (P. L. 107-204, 116 Stat. 745, Title IV) A particularized part of the Act, Section 404, requires management and outer auditor to report on the adequacy of the companys control over financial reports.This, however, is considered by many the look that costs most to implement as enormous effort is undeniable to document and test important financial controls. Since it requires both management and external auditor to perform assessment in the context of a top-down risk assessment, it must cover all aspects of compliance and thus require a good deal time, labor and cost. Ribstein & Butler, 2006, p. 100) Compliance with Section 404 of the Act has a much greater impact on smaller companies as there is a significant cost involved in completing their assessments. Ribstein and Butler (2006) contend that this necessitates many small businesses to elapse much than what they actual ly earn, driving a huge percentage of their expenditure on compliance alone. This eventually forces them to foreswear with public ownership.As an example, during 2004, U. S. companies with tax revenue enhancements exceeding $5 billion spent . 06% of revenue on compliance, while companies with less than $100 million in revenue spent 2. 55%. (U. S. Securities and Exchange Commission, 2006) It is quite unfair that small companies should domiciliate the brunt when they do not earn as much as their big counterparts, and the government must take steps and act on what can be seen as a drawback on such a well-intended regulation.In conclusion, while much of the Sarbanes-Oxley Act of 2002 was created and implemented to sponsor put public trust back into corporations through recognizing and rewarding honest corporate leadership while discplining and fining unaccountable ones, much must be done to help alleviate the apparent burden on small companies who have to spend much on compliance , so that they may flourish and be able to compete without being compelled to spend too much on something that is beyond their capacity. And we should look forward in continuing the good work that the Act itself represents in defending the public from fraudulent and malicious corporate activities.