An Analysis Of The Sarbanes-Oxley Act Of 2002
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AN ANALYSIS OF THE SARBANES-OXLEY ACT OF 2002
Because of numerous accounting scandals and many subsequent bankruptcies, the President and Congress have put into effect significant financial reform by the creation of the Sarbanes-Oxley Act of 2002 (“Act”). The purpose of this paper is to briefly analyze the impact the Act has on the business community.
To accomplish this purpose, this paper will briefly explore the circumstances leading to this legislation, discuss a brief summary of the main points of the Act, and analyze some of the ramifications for the corporate and accounting professions.
This paper examines the events that led to the need for a restructuring of the way companies account for their responsibilities to the public. A summary of the main points of the legislation that affects companies and accountants will be listed. Also discussed is the impact the Act has on the workload of the accountants and the increased costs for the businesses requiring compliance to the new legislation.
Important to this paper are the websites www.aicpa.org and www.sarbanes-oxley.com. Other reference material important to this paper, are cited in the endnotes.
SEC – Securities and Exchange Commission. This is the United States governing body that has primary responsibility for overseeing the regulation of the securities industry.
CPA – Certified Public Accountant. These are accounting professionals who have passed the Uniform CPA exam. Only CPAs are professionally licensed to provide to public, attestation opinions on publicly disseminated financial statements.
GAAP – Generally Accepted Accounting Rules. These are the accounting rules used to prepare financial statements for publicly traded and private companies.
GAO – General Accountability Office. This is the audit, evaluation, and investigative agency of the United States Congress.
AICPA – The American Institute of Certified Public Accountants. This is the largest professional organization of accountants in the United States. It is the primary organization defining Generally Accepted Auditing Standards.
FASB – The Financial Accounting Standards Board. The major organization to develop Generally Accepted Accounting Principles in the United States.
On December 2, 2001, less than a month after it admitted accounting errors that inflated earnings by almost $600 million since 1994, the Houston-based energy trading company, Enron Corporation, filed for bankruptcy protection. With $62.8 billion in assets, it became the largest bankruptcy case in U.S. history, dwarfing Texacos filing in 1987 when it had $35.9 billion in assets.
The day Enron filed for bankruptcy its stock closed at 72 cents, down from more than $75 less than a year earlier. Many employees lost their life savings and tens of thousands of investors lost billions.
Who is to Blame? That is what at least a half-dozen Congressional Committees, the SEC, the U.S. Justice Department, and an investigative panel appointed by Andersen LLP are trying to find out. Several parties may have contributed to this national tragedy – Enron top management and audit committee, their outside law firm, the auditors at Arthur Andersen, investment advisors, and the environment that encouraged the companys highly questionable practices. The challenge for investigators is to sort out the criminal activity (such as the alleged shredding of subpoenaed documents at both Enron and Andersen, possible insider trading, and knowingly falsifying financial documents), from the flaws in the system that allowed Enron to hide debt and losses.
The prevalence and magnitude of financial wrongdoing in publicly traded firms has become apparent in recent years, resulting in widespread economic loss and decline in investor confidence. The hiding of debt from regulators and stockholders by Enron executives and the conscience misclassification of expenses as assets by WorldCom are but two examples. Unfortunately, in at least one case (Enron) there has been evidence of auditor complicity in the wrongdoing (Arthur Anderson). The Sarbanes-Oxley Act of 2002 is an attempt by elected officials to combat these negative forces, which have been seen as having the potential to undermine the capital markets.
Basic Elements to the Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Act-which applies in general to publicly held companies and their audit firms-dramatically affects the accounting profession and impacts not just the largest accounting firms, but any CPA actively working as an auditor of, or for, a publicly traded company. The basic implications of the Act for accountants are summarized below.
Public Company Accounting Oversight Board. Moving to a different private sector regulatory structure, a new Public Company Accounting Oversight Board (the Board) will be appointed and overseen by the SEC. The Board, made up of five full-time members, will oversee and investigate the audits and auditors of public companies, and sanction both firms and individuals for violations of laws, regulations and rules.
Board Composition. Two of the five Board members must be or must have been CPAs. The remaining three must not be and cannot have been CPAs. One of the CPA members may hold the Chair, but he or she must not have practiced accounting during the five years preceding his/her appointment.
Funding. The Board will be funded by public companies through mandatory fees. Accounting firms that audit public companies must register with the Board (“registered firm”), and pay registration and annual fees.
Standard Setting. The Board will issue standards or adopt standards set by other groups or organizations, for audit firm quality controls for the audits of public companies. These standards include auditing and related attestation, quality control, ethics, independence