Sox's Impact On Financial Reporting Essay
The most influential and long lasting effect that SOX had on financial reporting was the creation of the PCAOB. One of the biggest issues before 2002 was that laws weren't being enforced. With the creation of this private company it would ensure that all laws and guidelines set in place were effective. The PCAOB is different from other companies because unlike others before it they were allowed to imposed taxes on auditing companies and public companies which allowed them a different budget that was sheltered from the Congressional Budget process. The PCAOB was also allowed to operate without the pressure of the public opinion and against law suits from audit and other companies which helped them significantly. Many feared this idea at first but it allowed them to do their job most
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effectively since they didn't have to worry about what the public thought and being sued. The corruption and fraud brought by large companies created a large mistrust from the public. This was a big gap that the SOX Act closed by now enforcing laws that already existed. SOX was made more independent from companies influences. Now that there was a new private company that would oversee auditing companies it changed the way auditing companies acted. For one auditing companies could be fined and sanctions for fraudulent behaviors or not overseeing companies properly so this created an incentive for auditors to be honest and investigate properly as they were now being held accounted for. The fact that they were being held accountable for any financial activities meant that companies could no longer influence auditing companies in forms of monetary compensation or any other form for that matter. Any publicly traded company now had to report things like auditor clients and even the auditor fees. External auditors could no longer provide certain services like they used to because all activities provided now had to be reported to the PCAOB and the Security and Exchange Commission. Services that included any sort of bookkeeping,financial informations system design, management functions, investment advising, or any legal services were prohibited. All these newly placed safeguards were placed in order to ensure that external as well as internal auditors could not abuse there powers and therefore made financial statements more reliable. Another major impact the SOX Act had was the responsibilities it required from corporations.
Prior to 2002 companies didn't have much internal control set in place and even if they were it was loosely enforced. This was all to the benefit of the top executives that could easily change figures and report false financial statements for personal gains. It was established that a separations on powers and responsibilities was needed to ensure that one person could not adjust anything by themselves without anyone having to check their work. This meant that now more people would have to verify statements and were held accountable with large monetary penalties and fees or even time in jail in cases of fraud. Now that high officials were being held accountable a new code of ethics was created amongst companies in order to inform all its employees of what is expected of them. Due to these new internal controls being implemented employees dealing with cash or physical assets were for the most part now bonded to ensure that theft wouldn't occur and even if it did other employees would find out because of physical controls like locks and security clearances that logged everyones
activities. Now with all these new mandates of SOX from corporations many companies and auditing executives opposed it all. Naturally with any business the goal is to maximize profit but many had a cost benefit analysis that said it would make enforcing these new laws and internal controls more costly then beneficial to the company as well as to the public. Only time could tell in this matter and throughout the years it has been proven that although cost for internal controls and external auditing companies were high it created a more efficient system for all. As the years went by these companies adjusted and constantly improved internal as well as external controls making them more cost more beneficial. In the grand scheme of things even with these high costs to companies studies have shown that the CFO’s, CEO’s as well as Board of Directors has seen an increase in public investors confidence that has been a result of SOX reducing fraudulent activities in these companies.
effectively since they didn't have to worry about what the public thought and being sued. The corruption and fraud brought by large companies created a large mistrust from the public. This was a big gap that the SOX Act closed by now enforcing laws that already existed. SOX was made more independent from companies influences. Now that there was a new private company that would oversee auditing companies it changed the way auditing companies acted. For one auditing companies could be fined and sanctions for fraudulent behaviors or not overseeing companies properly so this created an incentive for auditors to be honest and investigate properly as they were now being held accounted for. The fact that they were being held accountable for any financial activities meant that companies could no longer influence auditing companies in forms of monetary compensation or any other form for that matter. Any publicly traded company now had to report things like auditor clients and even the auditor fees. External auditors could no longer provide certain services like they used to because all activities provided now had to be reported to the PCAOB and the Security and Exchange Commission. Services that included any sort of bookkeeping,financial informations system design, management functions, investment advising, or any legal services were prohibited. All these newly placed safeguards were placed in order to ensure that external as well as internal auditors could not abuse there powers and therefore made financial statements more reliable. Another major impact the SOX Act had was the responsibilities it required from corporations.
Prior to 2002 companies didn't have much internal control set in place and even if they were it was loosely enforced. This was all to the benefit of the top executives that could easily change figures and report false financial statements for personal gains. It was established that a separations on powers and responsibilities was needed to ensure that one person could not adjust anything by themselves without anyone having to check their work. This meant that now more people would have to verify statements and were held accountable with large monetary penalties and fees or even time in jail in cases of fraud. Now that high officials were being held accountable a new code of ethics was created amongst companies in order to inform all its employees of what is expected of them. Due to these new internal controls being implemented employees dealing with cash or physical assets were for the most part now bonded to ensure that theft wouldn't occur and even if it did other employees would find out because of physical controls like locks and security clearances that logged everyones
activities. Now with all these new mandates of SOX from corporations many companies and auditing executives opposed it all. Naturally with any business the goal is to maximize profit but many had a cost benefit analysis that said it would make enforcing these new laws and internal controls more costly then beneficial to the company as well as to the public. Only time could tell in this matter and throughout the years it has been proven that although cost for internal controls and external auditing companies were high it created a more efficient system for all. As the years went by these companies adjusted and constantly improved internal as well as external controls making them more cost more beneficial. In the grand scheme of things even with these high costs to companies studies have shown that the CFO’s, CEO’s as well as Board of Directors has seen an increase in public investors confidence that has been a result of SOX reducing fraudulent activities in these companies.