25th August 2011 Essay Example

Topic: Sarbanes-Oxley Act (2002)

Lecturer’s name

25th August 2011


The Sarbanes-Oxley Act was enacted on 30th July 2002. It is also referred by different names in different quotas. For example, in the Senate it is known as the Investor Protection and Public Company Accounting Reform Act (Nicholson, 2002). In the House of Representatives, it is known as the Responsibility and the Corporate and Auditing Accountability Act. The Sarbanes-Oxley Act is named after its sponsors who include Michael Oxley (representative) and Paul Sarbanes (senator) (Salter, 2008).

The enactment of this law or bill followed the major accounting and corporate scandals that characterised major companies in the United States such as the Tyco International, Enron, Adelphia, WorldCom and Peregrine Systems (Healy & Krishna, 2003). The scandals resulted into the collapse of share prices of the above named companies causing the loss of billions of investor’s funds as well as the loss of investor’s confidence towards the security market in the United States. It is imperative to note that the Act does not apply to companies which are privately held meaning that it applies largely to public or government controlled and operated companies in the United States (Salter, 2008).

A part from affecting the financial aspect of the company the legislation also affects the information technology aspect of the company because the IT department in public corporations is bestowed with the responsibility of enhancing the security of financial and accounting records that are electronically generated (McLean & Peter, 2001). In this regard, all electronic messages, electronic records and business records must be stored and saved for a period of five years and more. The legislation also stipulates stiff penalties for failing to comply with the above requirements. Such penalties include imprisonment and hefty fines.

Sarbanes-Oxley Act: What it says

What the legislation says depends on the content of different titles of the Act. It has eleven titles. These titles give description of the requirements and mandates for financial reporting. The titles are further divided into sub-sections. The eleven titles include the Auditor Independence title which addresses a number of issues related to auditing such as reporting requirements of the auditors, partner rotation in auditing and approval requirements of the auditors (Bryce, 2008).

Under this title the standards for external auditor’s autonomy is stipulated in order to reduce the extent of conflicts of interests. The other title is the Public Company Accounting Oversight Board (PCAOB) which provides an avenue through which auditors should be registered by defining procedures and specific processes for audit compliance (Collins, 2006). The Corporate Responsibility is another title of the legalisation which says that completeness and accuracy of financial reports released by public companies should be the responsibility of the senior executives in the company (Fusaro & Ross, 2002).

Analyst’s Conflict of Interest is another tile of the legislation which says that necessary measures should be taken to restore investors’ confidence through accurate security analysts reporting (Fusaro & Ross, 2002). The enhanced financial disclosure title says that internal controls should be put in place in the company to enhance accuracy in the reporting of the financial position of the firm or company. Reports and Studies title says that different studies should be conducted by SEC and the comptroller general on different aspects such as studies on consolidation of firms that deal with public accounting (Bumiller, 2002). Commission Authority and Resources title defines different measures and practices that must be taken into consideration to restore the confidence of the investors (Kuschnik, 2008).

Criminal and Corporate Fraud Accountability title stipulates different penalties that follows the destruction, manipulation and alternation of financial records (Kuschnik, 2008). It also provides means of protecting the whistle-blowers. The Corporate Tax Returns title which requires the Chief Executive Officer to append his signature on the company’s tax returns (Kuschnik, 2008). The White Collar Crime Penalty Enhancement title stipulates more penalties that follow conspiracies and white-collar crimes (Kuschnik, 2008). The last title is the Corporate Fraud Accountability which says that tampering with financial records in the company and fraud are offices which attract stiff penalties (Farrell, 2005).

Meaning of effective

Effectiveness means the extent to which different committees have been able to comply and enhanced their standards of operations since the Sarbanes-Oxley legislations was enacted in 2002 ( Catharine, 2008). It also refers to the improvement in different committee processes in public companies related to the passage of the legislation.

Expectations from the Committees

Several committees are mentioned in the Sarbanes-Oxley legislation. They include Security Exchange Commission and the Public Company Accounting Oversight Board. The legislation expects SEC to define specific conditions and requirements which may be used to bar a person from practising as a dealer, an advisor or a broker (Deakin & Suzanne, 2003). SEC committee is also bestowed with the responsibility of barring and censuring securities professionals particularly when such securities professionals are involved in illegal or dishonesty gains (Piotroski & Srinivasan, 2008). PCAOB is also another committee expected to provide auditors or audit services to the companies. Board of Directors is also another committee expected to monitor financial reporting mechanisms on behalf of the investors in different corporations in the United States (Nicholson, 2002).

Research since 2002

One of the key researchers conducted on the legislation since 2002 was Piotroski and Srnivasan (2008). The study comprised of several international companies operating in the U.K and the U.S stock markets which were included in the sample. The study was based on reports before and after the Sarbanes-Oxley Act was enacted (Toffler & Jennifer, 2004). The results of the findings indicated that SOX imposed increasingly unbearable costs to small corporations as compared to large corporations (Piotroski & Srinivasan, 2008). The other research was conducted in 2007 by IIA or the Institute of Internal Auditors. The result of the study indicated that the confidence of the investors had increased drastically after the legislation.

How the Act works

As stated there above, the work of the SOX legislation is based on different titles and the sub-sections included in different tiles as explained above (Stephen, Michael & David, 2004). However, in financial terms the legislation is financed by the government which means that the operations of the legislation are dependent on the amount of funds released in the implementation of the legislation particularly in conducting different audit processes in different corporations in the US.

Figures of performance before and after SOX

This graph shows the performance of Enron Corporation before the SOX legislation came into full force. Investors in this company lost billions of money after the share price dropped drastically.

25th August 2011(Healy & Krishna, 2003).

However, after the act came into action the performance of many companies improved drastically because the avenues for stealing funds from the company were sealed. The graph below shows the general trend of performance of many companies after SOX.

P25th August 2011 1 erformance

25th August 2011 2

The curve shows a rising performance since 2002.

The peak of the curve in 2008 shows the effects of

25th August 2011 325th August 2011 425th August 2011 5economic recession Years


Bryce, R. (2008). Pipe Dreams: Greed, Ego, and the Death of Enron. New York: Sage Publishers.

Bumiller, E. (2002). “Bush Signs Bill Aimed at Fraud in Corporations”. The New York Times.

Catharine, S. (2008). «Sarbanes–Oxley Act of 2002 Five Years On: What Have We Learned?» Journal of Business & Technology Law: 333.

Collins, D. (2006). Behaving Badly: Ethical Lessons from Enron. Dog Ear Publishing, LLC

Deakin, S., & Suzanne J. (2003). “Learning from Enron” ESRC Centre for Business Research, Working Paper No 274): 9.

Farrell, G. (2005).«America Robbed Blind.» Wizard Academy Press.

Fusaro, P. & Ross, M. (2002). What Went Wrong at Enron: Everyone’s Guide to the Largest Bankruptcy in U.S. History. John Wiley & Sons

Healy, P, & Krishna G. (2003). “The Fall of Enron”. Journal of Economic Perspectives, 17 (2): 13

Kuschnik, B. (2008). The Sarbanes Oxley Act: «Big Brother is watching» you or Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law Journal, 64 – 95.

McLean, B., & Peter, E. (2001). The Smartest Guys in the Room. p. 142

Nicholson, J. (2002). Why was SOX Created? Journal of Business studies, Vol, 3 (6).

Piotroski, J. & Srinivasan, S. (2008). Regulation and Bonding: The Sarbanes–Oxley Act and the Flow of International Listings. New York: Sage Publishers.

Salter, M. (2008). Innovation Corrupted: The Origins and Legacy of Enron’s Collapse.

Stephen, M. Michael D. & David K. (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. Praeger Publishers.

Toffler, B. & Jennifer R. (2004). Final Accounting: Ambition, Greed and the Fall of Arthur Andersen.

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