Maintaining an effective accounting system provides many advantages. Firstly, the information provided is reliable; secondly, it becomes easy to protect company assets from theft. Moreover, it ensures that the company polices are adhered to and lastly, it makes it easy to comply with the government’s regulations. An effective accounting system should allow maintenance of proper records and adequate security for received cash. It should also ensure that cash disbursements are only done with proper authorizations. In addition, it should ensure that grants and other transactions are properly recorded and the accounting information availed on a timely basis.Let our writers help you! They will create your custom paper for $12.01 $10.21/page 322 academic experts online
The Sarbanes-Oxley (SOX) Act
The United States Congress in the year 2002, following countless corporate scandals in big companies in the United States, enacted a legislation to curb the vice. Senator Paul Sarbanes and US representative Michael Oxley patronized the bill whose goal was to strengthen corporate structures and governance, which in turn would reinstate investor’s confidence in the U.S stock market. Sox created new standards for corporate boards and audit committees.
It also set new standards for accountability as well as outlined penalties for corporate frauds or “wrong doings” and gave new independence to the external auditors. Lastly, it established the Public Company Accounting Oversight Board (PCAOB) mandating it to oversee and issue accounting standards for public accounting firms.
The intent of the SOX
The Sarbanes-Oxley law outlines the roles and responsibilities of the corporate executives, regulatory authorities, and Auditors defining how they interact while carrying out their duties. The Act stipulates the penalties for various acts of fraud and mismanagement of resources. All these measures are geared towards safeguarding financial data, which in turn enhances the confidence of the information users.
What necessitated the passing of SOX?
The law was enacted at a time when fraud cases in the United States involving prominent companies were increasing by day. Between 2000 and 2002, mega corporate scandals such as the Enron, Tyco international, and WorldCom cases emerged. These cases exposed the discrepancies that existed in the internal control and regulatory agencies. The analysis of the cases and their root cause led to the passage of the Sarbanes-Oxley Act. The losses suffered in the fraud cases were significantly huge and not only did they result in bankruptcy, but also stole the public trust in the U.S. stock market.
A detailed analysis of the fraud cases revealed key loopholes in the management and regulatory agencies. Bumiller (2002) highlights these discrepancies as following: The auditors in addition to their primary role of being the company “watch-Dog” offered other significant non-audit consultancy services, which gave rise to conflict of interests.Order now, and your customized paper without ANY plagiarism will be ready in merely 3 hours!
The scandals also revealed that the board members had ignored their duties, some even did not have the necessary expertise to act as such; and therefore, they could not act independent of the management. Banks did not properly analyze the true credit worthiness of the firms or the nature of their activities, as it was in the case of Enron. The executive compensation plans such as the stock options and bonus, coupled with the volatile stock prices waxed pressure on management. Consequently, based on the attractiveness of this form of compensation, management became highly abused.
The benefits of SOX
SOX ensures transparency and reliability of financial reports that helps to increase the investor’s confidence. Henselmann and Hofmann (2006) posit that, “in 2005, the Institute of Internal Auditors reported that corporations had improved their internal controls and that financial statements were perceived to be more reliable” (p.49).
It has also helped to cultivate a culture of good ethics in management instilling transparency, which enables employees to be responsible for their actions. According to Theodore (2006), the benefits of SOX to small and medium sized companies include continued evaluation on both documented financial and IT processes (p.5). Also due to developed financial control and IT processes, the company becomes more attractive both from the IPO or the acquirer’s point perspective.
The Costs of SOX
The implementation of SOX leads to extra costs as auditing fees and insurance for directors among other inevitable expenses like legal costs. In 2007, the estimated cost of implementation of Sox was estimated to amount to $4.7 million according to Finance Executive International. Other surveys carried on the same reveal that the compliance costs are substantially high.
The passage and implementation of the SOX Act has successfully helped in improving financial management and regulation of stock markets. It has also helped in wining the investors trust in the stock market. However, it is arguable that the costs incurred in its implementation process are significant and unnecessary.
Butler & Ribstein (2006) proposes that in Place of SOX, there exist many other strategies such as diversification of stock investment by the investors as a way of managing such risks efficiently (p.36). In conclusion, despite the costs that may result while implementing the SOX requirements, it should be emphasized that the act has great benefits to companies, investors, and market players.We'll complete your 1st custom-written order tailored to your instructions with 15% OFF!
Bumiller, E. (2002). Corporate Conduct: The President; Bush Signs Bill Aimed At Fraud in Corporations. The New York Times. Web.
Butler, H., & Ribstein, L. (2006). The Sarbanes-Oxley Debacle: What we’ve learned; How to Fix It. Washington, D.C: The AEI Press.
Henselmann, K., & Hofmann, S. (2010). Accounting Fraud: Case Studies and Practical Implications. Berlin: Schmidt Erich Verlag.
Theodore, F. (2006). Sarbanes-Oxley-Newfound Benefits. E-commerce Times, 40, 23-24.