Sarbanes-Oxley RecommendationsEssay Preview: Sarbanes-Oxley RecommendationsReport this essayPrepared by: Maged SolimanSubject: Sarbanes-Oxley recommendationsIn this essay I would like to discuss the implications of the Sarbanes-Oxley (SOX) legislation. This essay provides a brief history of SOXs creation, explains the relationship amongst the FASB, SEC and PCAOB, describes the pros and cons of SOX, assesses the impacts of SOX, and lists ethical considerations of SOX.
History of SOX – the Sarbanes-Oxley Act of 2002 is legislation in response to the high profile financial scandals, such as seen with Enron and WorldCom. The purpose of this act is to protect shareholders and the general public from accounting errors and fraudulent business practices. The Sarbanes-Oxley Act introduced stringent new rules to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Sarbanes-Oxley is not a set of business practices and does not specify how a business should store records; rather, Sarbanes-Oxley defines which records are to be stored and for how long.
The relationship among the FASB, SEC and PCAOB SOX are administered by the Securities and Exchange Commission (SEC). The SEC sets deadlines for compliance and publishes rules on requirements. The Securities and Exchange Commission (SEC) is the department to which all publicly-traded companies, effective since 2004, are required to submit annual reports of the effectiveness of their internal accounting controls. The SEC has broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. Along with them, is the FASB.
The Financial Accounting Standards Board (FASB), is a professional standards board created by accountants to establish Generally Accepted Accounting Principles (GAAP), which are the accounting standards used by accountants in the U.S. The GAAP reporting method makes it possible for investors and regulatory authorities to accurately determine an organizations financial results.
The Public Company Accounting Oversight Board (PCAOB) was created to oversee the activities of the auditing profession. Specifically to oversee the reforms mandated by the SOX legislation to enhance corporate responsibility, and financial disclosures, plus delete corporate and accounting fraud. The PCAOB is responsible for auditing, quality control, ethics, independence and other standards concerning the preparation of financial records. The Board oversees the audit of public companies that are subject to securities laws. Various sections of SOX requirements include the SEC determining whether the PCOAB is properly organized and has the capacity to carry out its responsibilities under the Act.
Cons of SOX one of the negative aspect of incorporating SOX into a business are that the act requires executives and board members to spend time on formulaic compliance efforts instead of leading their company. In addition, small public companies incur a higher percentage cost than large companies which could be an unfair financial burden, and business groups complain that it is costing them a lot of money and effort to turn up deficiencies that in most cases are inconsequential. Solomon et al. (2005) SOX have also been considered costly due to the updating of information systems in order to comply with reporting requirements. But, non-compliance may result in significant cost, stiff penalties and/or prison sentences.
Pros of SOX on a positive note, many analysts say this Act has made executives focus more attentive on financial records. This has prompted board members to take their work more seriously. Johnson et al. (2005) Disclosures are often more accurate and are produced in a timely manner. SOX increased shareholder value because it underlines the ethical operation of their company. Those who have invested in SOX have largely achieved or improved compliance, with 79 percent of respondents saying their controls are stronger than before the advent of SOX Barlas et al. (2004).
Impact of SOX the act has immediate and profound implications for the behavior and responsibilities of external auditors, management and the audit committee. Plus, even though nothing is explicitly required of internal auditors by SOX, the legislation will change their role within the firm. The act can be seen as an attempt to change the environment in which contracts are written and private behavior occurs. Linsley et al. (2003). The following three points of SOX are examples of the changes: (1) Ensure that the audit committee and the auditors are more independent. (2) Increase the consequences to the audit committee and the auditors if they submit incorrect reports, and (3) Make management formally recognize and accept responsibility not only for the financials, but also for the internal control system.
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For a full and compelling legal analysis to better inform the interpretation of statutory requirements and requirements, our research team, from the Center for Legal Review’s Office of Legal Affairs and the U.S. Office of Government Ethics, has conducted the OIL Research Brief to support our research. Our research is based on a series of legal studies: The Office of Labor and Industry Reform Research Study (OPR) (2010), “Corporate Accountability, Enforcement and Compliance Enforcement” , http://www.opr.gov/rlsvh/research-reports-2010/documents-c.html. OLR Research Brief: Proposing a Constitutional amendment to the U.S. Constitution to authorize all Federal employees, including federal and local law enforcement officials, to conduct certain types of internal investigation involving the employment of law enforcement officials.
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It is difficult to over-estimate the impact of SOX, however, since not all state statutes apply, and this would require legislation to include provisions of the OIL under which state government employees could conduct internal investigations. To overcome this, however, we applied a set of statutory provisions, such as the Anti-Corruption Rule, that have been found to disproportionately influence behavior and accountability in law enforcement. Under the proposed statute, employees who may be subject to investigation will receive a 1-year suspension. The law requires that employees with “perceived risk of being sued because of a violation involving the hiring, control, hiring or control of a confidential governmental agency may not be subject to investigation on a temporary (5 years) basis from any time the agency may consider that the disclosure of information concerning such investigation is to the detriment of their job security”. See this report that appeared in the National Archives of the United States. OLS Research Brief: Proposing a Constitutional amendment to the U.S. Constitution to authorize all Federal employees to conduct certain types of internal investigations involving the employment of law enforcement officials.
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We believe that a constitutional amendment to the U.S. Constitution would have greatly enhanced transparency between government agencies operating as outside auditors. Under this legislation, the current laws regarding employees’ information are significantly different from the protections provided to employees on the federal and state level. In this regard, we encourage the Senate and House of Representatives to introduce Constitutional amendments to strengthen security and oversight of both federal and state government employees in the near term.
Criminal Procedure
In May 2009, a federal court ruled that federal workers, judges, and prosecutors are entitled to “reasonable” access to and disclosure of confidential information. See the ruling by the U.S. Courts of Appeals for the District of Columbia Circuit, 642 F. 3d 638, 640 (2009) (“As the courts now consider the issue, the use of confidential information in criminal cases has expanded dramatically in recent years from its former colonial status and is now largely in line with the development of state and local law enforcement legislation and procedures”); United States v. Farkas, 662 F. Supp. 613, 633–34 (SD Ct. App. 1st Cir. 2011) (citing U
“People have said these things are starting to filter down to smaller, non-public companies, Banks are requiring different standards for corporate governance which has increased as a direct result of Sarbanes-Oxley. People have started talking about spending more for internal controls, software, having to hire more auditors and higher D&O [directors and officers] insurance.” Leport et al. (2005)
Many improvements in financial transparency of companies are a direct result of the implementation of SOX. According to R. Kulzick of St. Thomas University, the SOX act improved the financial transparency of public companies through the following examples:
(1) Accounting standards and oversight improvements enhance the accuracy, consistency, appropriateness, completeness, clarity, governance and enforcement of financial information, (2) Changes in the reporting of standards improve the financial information timeliness and availability of financial