In the past, the accountability of companies that participate in the American market could be easily disguised by cooperation, since it was the executives who defined the financial statements. However, from the creation of a law called Sarbanes-Oxley these fraudulent practices began to be fought. Sarbanes-Oxley is part of the risk mitigation process, created by the US government in 2002. Thus, companies listed on the Securities and Exchange Commission began to be governed by the guidelines of this law.
The two politicians came together to propose a bill that aimed to protect investors from succumbing to fraudulent activities by the corporation they invested in. The protection would require that corporations provide accurate and reliable financial information in their financial statements. Therefore, this birthed the Public Company Accounting Reform and Investor Protection Act of 2002. Congress certified the bill, and President George W. Bush signed it, making it a law. Congress then gave the bill the name of the two sponsors, hence the Sarbanes-Oxley Act. In short the Sarbanes-Oxley summary required stricter regulations and rules for auditors, corporate officers, and accountants to ensure that they provided correct and accurate accounting information.
Effect on the U.S. Economy
Private companies must also adopt SOX-type governance and internal control structures. Otherwise, they face increased difficulties. They will have trouble raising capital. They will also face higher insurance premiums and greater civil liability. These would create a loss of status among potential customers, investors, and donors.
SOX increased audit costs. This was a greater burden for small companies than for large ones. It may have convinced some businesses to use private equity funding instead of using the stock market.
Main advantages of Sarbanes Oxley Act.
Here are some of the advantages of the Sarbanes-Oxley Act.
1. Companies became responsible for their actions. Before the SOx Act, companies were not required to be very transparent. Even shareholders had difficulty getting information about investments. By requiring clear accounting practices and defining ethical transactions, SOx began to oblige companies to follow certain procedures in order to provide transparent services.
2. Executives became responsible for their actions. Prior to the law passed in 2002, executives were often not held personally or criminally responsible for financial information fraud. With SOx, CFOs take full responsibility.
3. Trust restored. As any potential negative impact had to be evaluated and published by the companies, investors began to have some of the confidence they had lost restored. Shareholders and the general public are also assured of the veracity of financial data, including balance sheets.
4. Improved internal controls. Better internal controls lead to more accurate information. With accurate information, better planning and investment can happen in the short and long term.
5. Protected shareholders. Shareholders now have accurate information about the finances of the companies they intend to invest in, such as assets, debts, risk profile, as well as transactions. This protects the interests of potential investors.
Sarbanes Oxley Act – Summary.
Many thousands of companies face the task of ensuring their accounting operations are in compliance with the Sarbanes Oxley Act. Auditing departments typically first have a comprehensive external audit by a Sarbanes-Oxley compliance specialist performed to identify areas of risk. Next, specialized software is installed that provides the “electronic paper trails” necessary to ensure Sarbanes-Oxley compliance.
The summary highlights of the most important Sarbanes-Oxley sections for compliance are listed below. Note that certification and specific public actions are required by companies to remain in SOX compliance. Also see the Sarbanes-Oxley Act Table of Contents.