Description Of The Sarbanes-Oxley Act
What is the Sarbanes - Oxley Act? There are actually various different definitions, but they all have the same common meaning. The Sarbanes - Oxley Act (SOX) is an act that was passed by the United States Congress to protect shareholders and the general public from accounting errors and unlawful practices in the enterprise. It also improves the accuracy of corporate disclosures. According to Julia Hanna (2014), “it is widely deemed the most important piece of security legislation since formation of the Securities and Exchange Commission in 1934.” The Sarbanes - Oxley Act was thought of because of a series of financial scandals involving big name companies that occurred in the early 2000s. The companies involved with these financial scandals
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included: Enron, WorldCom and Tyco. The act was drafted by Congressmen Paul Sarbanes and Michael Oxley and was aimed at improving corporate governance and accountability. It was later passed by Congress in the year 2002. Now, all organizations, whether big or small, must comply with the Sarbanes - Oxley Act because it is mandatory.
The Sarbanes – Oxley Act and Information Technology Departments
Not only does the act affect the financial side of corporations, it also affects the Information Technology (IT) departments charged with storing a corporation's electronic records. Many people tend to ponder on how exactly the act affects the IT departments of corporations. Some people believe the act tells businesses owners how to run their businesses and store their records; however, it is not a set of business practices and does not specify how a business should store its records. What the act does do is define which records should be stored and for how long. In fact, “SOX states that all business records, including electronic records and electronic messages, must be saved for "not less than five years." IT departments are increasingly tasked with creating and maintaining a corporate records archive in a cost effective fashion that satisfies the requirements put forth by the legislation” (Rouse, 2014).
The Titles and Sections of the Sarbanes – Oxley Act
The Sarbanes - Oxley Act is arranged into eleven titles.
The most important sections of these titles are often considered to be 302, 401, 404, 409, 802 and 906. Section 302 is about the corporate responsibilities regarding financial reports. Section 401 pertains to disclosures in periodic reports also known as off balance sheet items. The most controversial section of the Sarbanes - Oxley Act is Section 404, which requires management to produce an "internal control report" as part of each annual Exchange Act report. This is the most costly part of the act for businesses to perform because documenting and testing important financial controls requires great effort. Section 409 deals with real time issuer disclosures. This section requires issuers to disclose to the public, on an dire basis, information on material changes in their financial condition or operations. The three rules that affect the management of electronic records is located in Section 802 of the Sarbanes - Oxley Act. The first rule deals with the destruction, alteration or falsification of records, and the resulting penalties. The second rule explains the retention period for records storage. It indicates that corporations should securely store all business records using the same guidelines set for public accountants. The third rule refers to the type of business records that need to be stored, including all business records and communications, which also includes electronic communications. If a business fails …show more content…
to comply with these rules, whoever is responsible is subject to fines, jail time, or both. Section 906 indicates the criminal punishments for certifying a misleading or fraudulent financial report. Punishments can be as much as $5 million in fines, 20 years in prison, or both depending on the crime. According to the website www.sarbanes-oxley-101.com, the criminal penalties section states: “Whoever - (1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or (2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.”
Pros and Cons.
“The biggest pro has to be the restoration of investor confidence, which was the primary purpose of the act. The most obvious con is the cost” (Keglovits). One pro of the Sarbanes – Oxley Act is companies have better internal control environments. This helps lead to more accurate information being available to investors. Another pro is everyone in financial reporting has increased responsibilities and consequences for not living up to those responsibilities. This helps ensure people know exactly what their responsibilities are while working and that they will do these responsibilities or suffer the consequences. One con of the Act is smaller companies that are audited will have to pay higher audit fees even if they are not subject to Sarbanes – Oxley. This is because auditors are now more responsible and accountable for their audit reports on their clients, which means that more audit testing is done. Another con is the act was passed without any specific guidance to companies as to how it should be implemented. This resulted in companies making their own ways to assure compliance, which was ineffective and
expensive.
Conclusion. The Sarbanes – Oxley Act has helped the accounting world tremendously. Despite some cons of the act, the pros seem to outweigh them. SOX provided accounting with certain rules and regulations that have helped prevent fraudulent accounting practices. It also provides consequences for anyone who does not follow the rules. Thanks to my research, I believe the Sarbanes - Oxley Act is one of the most important acts passed for accounting, much like Julia Hanna thought it was the most important security legislation since the formation of the Securities and Exchange Commission. I believe SOX will be used in accounting for many generations to come.
included: Enron, WorldCom and Tyco. The act was drafted by Congressmen Paul Sarbanes and Michael Oxley and was aimed at improving corporate governance and accountability. It was later passed by Congress in the year 2002. Now, all organizations, whether big or small, must comply with the Sarbanes - Oxley Act because it is mandatory.
The Sarbanes – Oxley Act and Information Technology Departments
Not only does the act affect the financial side of corporations, it also affects the Information Technology (IT) departments charged with storing a corporation's electronic records. Many people tend to ponder on how exactly the act affects the IT departments of corporations. Some people believe the act tells businesses owners how to run their businesses and store their records; however, it is not a set of business practices and does not specify how a business should store its records. What the act does do is define which records should be stored and for how long. In fact, “SOX states that all business records, including electronic records and electronic messages, must be saved for "not less than five years." IT departments are increasingly tasked with creating and maintaining a corporate records archive in a cost effective fashion that satisfies the requirements put forth by the legislation” (Rouse, 2014).
The Titles and Sections of the Sarbanes – Oxley Act
The Sarbanes - Oxley Act is arranged into eleven titles.
The most important sections of these titles are often considered to be 302, 401, 404, 409, 802 and 906. Section 302 is about the corporate responsibilities regarding financial reports. Section 401 pertains to disclosures in periodic reports also known as off balance sheet items. The most controversial section of the Sarbanes - Oxley Act is Section 404, which requires management to produce an "internal control report" as part of each annual Exchange Act report. This is the most costly part of the act for businesses to perform because documenting and testing important financial controls requires great effort. Section 409 deals with real time issuer disclosures. This section requires issuers to disclose to the public, on an dire basis, information on material changes in their financial condition or operations. The three rules that affect the management of electronic records is located in Section 802 of the Sarbanes - Oxley Act. The first rule deals with the destruction, alteration or falsification of records, and the resulting penalties. The second rule explains the retention period for records storage. It indicates that corporations should securely store all business records using the same guidelines set for public accountants. The third rule refers to the type of business records that need to be stored, including all business records and communications, which also includes electronic communications. If a business fails …show more content…
to comply with these rules, whoever is responsible is subject to fines, jail time, or both. Section 906 indicates the criminal punishments for certifying a misleading or fraudulent financial report. Punishments can be as much as $5 million in fines, 20 years in prison, or both depending on the crime. According to the website www.sarbanes-oxley-101.com, the criminal penalties section states: “Whoever - (1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or (2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.”
Pros and Cons.
“The biggest pro has to be the restoration of investor confidence, which was the primary purpose of the act. The most obvious con is the cost” (Keglovits). One pro of the Sarbanes – Oxley Act is companies have better internal control environments. This helps lead to more accurate information being available to investors. Another pro is everyone in financial reporting has increased responsibilities and consequences for not living up to those responsibilities. This helps ensure people know exactly what their responsibilities are while working and that they will do these responsibilities or suffer the consequences. One con of the Act is smaller companies that are audited will have to pay higher audit fees even if they are not subject to Sarbanes – Oxley. This is because auditors are now more responsible and accountable for their audit reports on their clients, which means that more audit testing is done. Another con is the act was passed without any specific guidance to companies as to how it should be implemented. This resulted in companies making their own ways to assure compliance, which was ineffective and
expensive.
Conclusion. The Sarbanes – Oxley Act has helped the accounting world tremendously. Despite some cons of the act, the pros seem to outweigh them. SOX provided accounting with certain rules and regulations that have helped prevent fraudulent accounting practices. It also provides consequences for anyone who does not follow the rules. Thanks to my research, I believe the Sarbanes - Oxley Act is one of the most important acts passed for accounting, much like Julia Hanna thought it was the most important security legislation since the formation of the Securities and Exchange Commission. I believe SOX will be used in accounting for many generations to come.