Introduction
The Sarbanes-Oxley Act of 2002 (SOX) was ratified following numerous cases of major financial scandals that were experienced in several companies such as WorldCom and Enron. Some of the scandals resulted in multi-billion losses to investors. They also interfered with trading at the securities markets in the US. The act was enacted to safeguard capital providers from the likelihood of fraudulent accounting practices. Specifically, the act outlined several changes to enhance financial disclosures and corporate responsibility to reduce accounting and corporate fraud. Further, the act authorized the creation of the Public Company Accounting Oversight Board (PCAOB). The role of the board was to supervise the undertakings of the auditing profession.
Titles of SOX
The Sarbanes-Oxley Act is made of eleven titles. The first title gives a guideline on the establishment and operation of the PCAOB. A central oversight board was also created under this title with the mandate of cataloging auditors and outlining the process of executing the auditing function. The second title of the act focuses on external auditor independence. Some of the sections under this title are the standards that guide the independence of external auditors, audit partner rotation, selection and approval requirements for a new auditor, conflict of interest, and reporting requirements for an auditor among others. The third title looks at corporate responsibility.
The section requires that the top management be held accountable for the correctness and fullness of financial reports. The title further outlines the responsibilities of the company officers and the communication between the external auditors and audit committees. The fourth title focuses on enhanced financial disclosures. The sections under this title give the improved reporting necessities for various transactions. It also gives the internal control framework. The analyst’s conflict of interest is outlined in title five. This title gives information on the treatment of various securities analysts.
The sixth title discusses the resources and authority of the Securities and Exchange Commission (SEC). Title seven mandates SEC and Comptroller General to conduct several studies and report their findings. The eighth title commonly known as the Corporate and Criminal Fraud Accountability of 2002 gives information on penalties for various crimes such as modification, destruction, and manipulation of financial records. The ninth title commonly known White Collar Crime Penalty Enhancement Act of 2002 outlines the various penalties for white-collar crimes and other intrigues.
The tenth title, which is on the corporate tax return, requires the top leadership of a company to take responsibility for tax returns by signing. The final title of the act, commonly known as the Corporate Fraud Act of 2002, discusses corporate fraud. Under this title, the criminal penalties are increased. It also gives the SEC the authority to prohibit persons to serve as employees or directors of a company. Thus, SOX solved several problems that were being experienced such as funding of the SEC, conflict of interest of auditors and security analysts, banking practices, compensation of senior officers, and internet bubble.
Conclusion
The Sarbanes-Oxley Act comes with several costs and benefits. The main category of the cost was compliance cost. However, it declined over time. Some of the benefits that were experienced by firms and investors are improved corporate transparency, reduced borrowing costs, improved accountability, improved internal control environment, and enhanced credibility of auditing function.