Adoption of the Sarbanes-Oxley Act, Term Paper Example

Introduction

The Sarbanes-Oxley Act enforced in July 2002, has initiated key changes in financial practice and corporate governance regulation (Sarbanes-Oxley Forum, 2006).

Analysis of the New or Enhanced Standards for All U.S. Public Company Boards, Management, and Public Accounting Firms That the SOX Required

This new Act set restrictions for the corporate accountability. The Act comprises of a total of eleven titles. The Public Company Accounting Oversight Board was established under the first title. Title two provides to set limitations for prospective conflicts of interests specifically in auditing firms. Title three stipulates corporate duty to make available company’s financial reports. Under this title the audit committee is granted autonomous supervision of the accounting firm. Title four scrutinizes some of the doubtful accounting practices that contributed to a downward spiral. Title five gives the procedures requisite for the securities analysts. Title six financial supported the Securities and Exchange Commission, provide authority to censure stock brokers or stopped any engaging in their professions (Sarbanes-Oxley Forum, 2006).

In the seventh title the Government Accountability Office is mandated to study the consolidation of public accounting firms as well as the consequence of independent audits. The Government Accountability Office is also mandated to offer solutions to difficulties encountered in the implementation process of the Act.  Corporate fraud comprising acts such as damage, modification, falsification of corporate records and defraud of company shareholders attracts criminal penalties according to title eight. It also stipulates Federal penalty for impediment of justice as well as fraud. Title nine provides guidance for sentencing culprits involved in the stipulated malpractices. The Chief Executive Officer (CEO) of the company is required under title ten to sign the company’s Federal Tax returns. Corporate Fraud Accountability under title eleven facilitates the Securities and Exchange Commission to provisionally freeze huge or unusual payments where acts of corporate fraud and corruption of company records is found.  This eleventh title modifies sentencing strategies and reinforces their penalties (Sarbanes-Oxley Forum, 2006).

Examine Why the New Enhanced Standards Are Necessary

The new enhanced standards were necessitated by an upsurge of major accounting scandals in the corporate world. Systems of corporate governance as well as financial reporting were proven to be ineffectual and needed improvement. The scenario demonstrated that checks-and-balances in the systems for financial reporting were incapable of averting or detecting significant fraud in key corporations. Consequently, Congress reacted by passing the Sarbanes-Oxley Act of 2002. In essence, the Act demands for upgrading in the checks-and-balances that govern the generation of financial data presented to investors (U.S. Securities and Exchange Commission, 2003).

Evaluate the Benefits and Costs of the SOX

The implementation costs of the internal control provisions of the Sarbanes- Oxley Act of 2002 have been astronomical. The Financial Executives International puts the predictable average cost in the first-year at 27,000 hours of internal time for companies with an average of $5 billion in sales. It also gave the anticipated total costs of compliance as $4.36 million in the average first year expenditure.

The evaluation process has resulted in upgrading in fundamental internal controls such as segregation of duties and reconciliations. Companies have more assurance in their control framework and are evaluating risks in accounting, which ought to facilitate investors to have more confidence in the trustworthiness of unaudited data provided to the securities market.

Many of the Chief Audit Executives desire to sustain a strong presence in the risk and control field. They recognize the urgency to execute extra operational auditing that adds value to the company. A majority of Chief Audit Executives consider themselves playing a central role in current monitoring and testing proceedings connected with SOX work (Rittenberg & Miller, 2005).

Compare and Contrast the Reactions of Companies and Companies’ Executives to the SOX and its Requirements

In support of the general CEO/CFO certification, Coca-Cola extended its existing yearly processes to every quarter. Official written account is necessary from every operating unit’s leader, legal counsel, Chief Financial Officer (CFO), as well as the leaders of the company’s international functions. Replicated from the external auditor account letters, elements from the CEO/CFO certification are integrated besides operating management’s duty to recognize business developments and trends.

Tenneco Automotive has adapted parallel actions in relation to SOX certifications. Formalizing processes are currently in place. It has assembled a disclosures control and procedures guidebook that elaborates the steps concerned in presenting the appropriate disclosures. The manual also presents a timeline from the end of every quarter in the report filing date covers the groundwork of earnings press releases in addition to Management’s Discussion and Analysis.

RWD Technologies, a systems integrator for technology and business and solutions, has as a component of its disclosure and certification procedure, guaranteed that every operating unit provides a quarterly certification, and thoroughly reviews the company’s imminent Securities and Exchange Commission filing and fully comprehend the implication of the process of certification. RWD’s general counsel, as well as the Chief Finance Officers are driving changes in the company and communicating necessities to every group’s executive director, who, sequentially, reports straight to group presidents (Graziano & Cheryl, 2002).

Analyze the Changes in Accounting Practices Due To the Adoption of the Act

An appraisal of the probable effectiveness of an objectives-oriented standard setting approach ought to be executed in the context of the other reforms connected to the Act. The reforms of the Act entail management to admit responsibility for guaranteeing that the financial data presented to investors reasonably illustrates the organization’s financial status, outcomes of operations, as well as cash flows. In addition, management is obligated to guarantee that it has appropriate disclosure controls in site so that the organization will be able to present plain and transparent disclosure to investors of all necessary data.  Additionally, through the PCAOB, audit processes as well as auditors will be more strictly scrutinized. As the appraisal of auditors moves from “peer review” to Public Company Accounting Oversight Board (PCAOB) inspection, it will create an additional premium on the auditors’ aptitude to appraise both conformity with Generally Accepted Accounting Principles and the sufficiency of the organization’s disclosures in tandem with the fundamental economic essence of the organization’s transactions (U.S Securities and Exchange Commission, 2003).

References

Graziano, M & Cheryl (2002). Implementing Sarbanes-Oxley: early feedback. (Regulatory). Financial Executive retrieved June 5, 2011 from http://www.allbusiness.com/business- planning-structures/business-structures/382181-1.html

Rittenberg, L & Miller, P, (2005). Sarbanes-Oxley Section 404 Work; Looking at the Benefits. The Institute of Internal Auditors. Research Foundation. Retrieved June 5, 2011, from http://www.theiia.org/research

Sarbanes-Oxley Forum, (2006).A guide to the Sarbanes-Oxley Act. Retrieved June 5, 2011 from http://www.soxlaw.com/introduction.htm

U.S Securities and Exchange Commission, (2003). Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System a Principles-Based Accounting System http://www.sec.gov/news/studies/principlesbasedstand.htm#1