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The primary goals and tenets of the Sarbanes-Oxley Act of 2002 (SOX) are to generate a framework transparency to the activities and financial reports of companies, and give greater certainty and confidence to investors and the state itself. SOX are focused on making financial statements less susceptible to fraud and modernizing the auditing process to restore investor confidence and public trust in financial information (Wells, p. 278). Moreover, Sox calls for corporate management to be more accountable for both fraud prevention and detection. Similarly, corporate management is also more accountable for the presence of fraud with the corporation; under SOX, those who participate in fraudulent activities will be dealt with severe civil and criminal penalties. Finally, SOX also created protective freedoms for the whistleblowers of the corporate fraud; this is extremely important because whistleblowers were often victimized for speaking out against the fraudulent activity within the organization. "Whistleblowers who report corporate fraud or other misconduct to the government could receive sizable cash awards under new rules adopted in May 2011 by federal regulators." http://jobs.aol.com/articles/2011/05/25/new-rules-offer-big-cash-awards-to-whistleblowers/
How is SOX enforced?
The Sarbanes-Oxley Act of 2002 also provides the Securities and Exchange Commission (SEC) with authoritative powers to employ the goals and tenets of SOX; to issue implementation rules on many of its provisions intended to improve corporate governance, financial reporting, and audit functions (Wells, p. 279) Prohibit officers and directors from subverting the auditor's responsibilities to investors to conduct a diligent audit of the issuer's financial statements and to provide a true report of the auditor's findings. As discussed in the textbook, (Wells, .p 279). Management would refrain from exerting undue influence in the audit process and violating the code of ethical conduct between senior financial officers and the financially adept audit committee, also management would exercise more reported involvement in the internal controls of financial reporting; additionally, attorneys and audit committees were also given initiatives for proper conduct and autonomy as well respectively.
Corporate records were expected to list management disclosures regarding off-sheet balances and aggregate contractual obligations as well as certifications for disclosure in companies quarterly and annual reports; furthermore, relevant documentation for the auditing process was not to be discarded as it had been previously before. The retention of relevant records such as work papers, documents that form the basis of an audit or review, memoranda, communications, other documents, and records that are created, sent, or are received with respect to an audit or review and contain conclusions, opinions, analyzes, or financial data related to the audit or review, which is conducted by any accountant. Those who violate these rules may be fined and / or imprisoned for up to 10 years.
Thought rules provide the creation of an environment that promotes strong marketplace integrity, improves the probability of detection and prevention of corporate misstatements and restore public confidence in the quality and transparency of financial information.
What is PCAOB, its role, and based upon individual research, is it an effective oversight body?
To further assist the SEC with the implementation of the goals and tenets of SOX, the Public Company Accountancy Oversight Board (PCAOB) was established. The PCAOB was established as a non-profit entity by the SEC.
It is comprised of five individuals who are appointed and are overseen by the SEC; two of the individuals have either been or are currently Certified Public Accountants (CPAs) and the remaining three not have been CPAs. The five member board is responsible for overseeing public company audits including requiring U.S. public auditors to be subjected to external and independent oversight, setting audit standards, and investigating acts of non-compliance by auditors or audit firms (Wells, p.279-280)
Although all responsibilities given to the PCAOB are important, the first one is especially relevant because U.S public auditors were not subjected to external and independent oversight prior to the PCAOB; rather, U.S. public auditors regulated their own actions. In addition, the PCAOB also "is responsible for overseeing broker-dealers audits including compliance reports filed pursuant to federal securities laws, to promote investor protection." http://pcaobus.org/About/Pages/default.aspx)
The PCAOB is not an autonomous entity; it is also subjected to the oversight authority of the SEC. The SEC oversight also encompasses rendering final approval of the PCAOBs regulations, standards, budgets, investigations, and sanctions.
I think the PCAOB is and effective oversight body, and has set important goals, but not has accomplished completely it mission; the PCAOB has a mission that is a work- in - progress. PCAOB should adopt a strategy that anticipates and prevents audit failures, i.e. more effective approach to oversight. Audit errors are not caused by errors isolated; it will be systematic factors such as poor audit, lack of training and serve high-risk clients. Some studies confirm "that audit failures are due to systemic failures in quality control programs", hence should be a systematic increase of the quality of work of the auditor. Regardless, I believe it was a wise decision by the SEC delegate the task of auditing oversight to the PCAOB, and also to oversee it's (the PCAOBs) actions as well. In the SOX-SEC-PCAOB scenario, the PCAOB is monitored by the SEC; likewise, SEC is monitored by SOX and the SEC has the authority to implement changes (i.e. monitor) SOX as well.
Integral Course of Audit. Mexico City. 2004. American Association of Professionals and Tourism Entrepreneurs.
Based upon the goals of SOX, how it is implemented and enforced, through your own experience and research (both if applicable) has SOX been a successful deterrent to financial statement fraud? Why or why not?
In the past year, many companies found that the costs for compliance with the SOX may be too high. But the truth is that SOX provides a more rigorous data review of information that a company declares in their financial statements, used to its internal controls, and not only encompass fraud by false statements, also by inference, and all fraud cases in which, significantly, distortions the financial information, and misappropriation of assets, corruption, among others. SOX established protocol for lessening the probability of financial statement fraud. The SOX established a new paradigm corporate responsibility. It SOX also sought to strengthen consumer and investor confidence and trust in financial information by changing the auditing process and making management more accountable for fraud prevention, detection, and existence within the corporation.
The SOX has done much to prevent fraud, however, "financial reporting fraud intentional misrepresentation of a material to the financial statements of a company remains a serious concern for investors and other stakeholders in the capital market."
The three conditions, Opportunity, Pressure and Rationalization typically will be present when individuals commit fraud.