Introduction Of The Sarbanes Oxley Act Accounting Essay

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Today, the development of business confronts multiple challenges and problems because some public companies, including non-profit organizations, tend to fraud and manipulate with information as well as financial resources to improve their performance and to maintain their positive public image. At the same time, the ignorance of basic rules and norms of business ethics leads to downfall of large organizations. In this respect, it is worth mentioning the case of Enron which actually stimulated legislators to regulate public companies accounting to increase their transparency and reliability. In such a situation, legislators apparently attempted to protect investors and stakeholders from potential losses caused by fraudulent actions of some persons playing leading parts in performance of public companies. In terms of new regulative policies the Sarbanes-Oxley Act was implemented in 2002 to protect investors and improve public companies accountability.

On analyzing the introduction of the Sarbanes-Oxley Act of 2002, it is necessary to take into consideration the context in which the act was implemented and reasons why it was implemented. In this regard, the Enron scandal played the key role in the implementation of the act. The Enron scandal has revealed numerous problems that exists in the modern American business as well as politics. At the same time, the core of all the problems of Enron lays in the mentality of top executives and such large corporations as Enron as well as smaller ones. In actuality, the strife for profit and maximization of profits become the dominant factors which define the policy of companies and their strategies. In such a context, it is possible to estimate that such a pursuit of maximum profit is based on the principle that ends justify means. On the other hand, the negative experience of Enron perfectly proves the extent to which this principle is erroneous and to what disastrous effects the strife for maximum profits can lead. In such a situation, it is obvious that the dominating “bottom lineâ€Â mentality of corporations should be totally changed and corporations should be conscious of high risks of their strife for maximum profits.

On analyzing the current situation and modern business environment, it is necessary to underline that fast and huge profit goes ahead of ethical issues and moral concerns in the modern business. As a result, basic moral and ethical norms are easily violated when a corporation receives a chance to increase its profits consistently. In fact, today, ethics and morality are inferior, while profit is superior and it is very difficult to change such a mentality.

Nevertheless, it is necessary to start acting right now to change the situation for better. In this respect, it is possible to recommend introduction of ethical codes which could define basic ethical norms and principles regulating the relationship within corporations between executives and employees as well as the policy of corporations and its external relations with its customer and business partners. However, the creation of ethical codes is rather a benevolent action which does not lead to actual legal responsibility of corporations for its unfair or unethical policies.

At the same time, it is obvious that Enron has violated not only ethical but also legal norms. Therefore, the Enron scandal could be prevented if governmental agencies performed their functions effectively. The state control over the policy of the company and the correspondence of its actions to the existing legal norms could minimize the risk of the failure of Enron. Moreover, the pressure from the part of the state in the form of a strict control could increase the responsibility of top executives of Enron and, thus, it could prevent the downfall of the corporation and the scandal which accompanied the downfall.

In such a way, it is possible to conclude that the current profit-oriented mentality can be changed on the condition that actions are undertaken in two dimensions. On the one hand, corporations should change their policies and organizational culture and become ethically more responsible that may need the introduction of ethical codes in corporations. On the other hand, the role of the state is very significant since the state is the major regulator which should control the legality of policies of corporations.

In such a way, the Enron scandal revealed the ineffectiveness of existing regulations and the Sarbanes-Oxley Act of 2002 was supposed to improve the situation. The Sarbanes-Oxley Act enhances financial reporting of public organizations, including non-profit organizations. The legislators attempted to make financial reporting more transparent and prevent any risk of fraud or manipulations. For this purpose, the Sarbanes-Oxley Act introduced the Public Company Accounting Oversight Board which should monitor and control financial reporting of a public company. In addition, the act stressed the independence of auditors that maximized the effectiveness and objectivity of auditing minimizing the risk of errors and misinterpretation of financial facts. The act increased the corporation responsibility for the accuracy and completeness of corporate financial reports. The act enhanced financial disclosures and defined the conduct of securities analysts to increase the confidence of investors in transparency and reliability of public organizations.

In such a situation, a non-profit organization should also improve its accounting system to meet the Sarbanes-Oxley Act’s requirements. In this respect, it should be said that the non-profit organization should introduce changes to meet the requirements of the act. To put it more precisely, the non-profit organization has to create the public company oversight board which should include independent professionals who can monitor and control financial reporting of the non-profit organization to prove the public that the non-profit organizations functions in accordance to existing legal norms. In addition, the board will be a supplementary element of control to prevent the risk of frauds in financial reporting of the organizations. Furthermore, the non-profit organization may need to change its auditors and extent their access to the organization’s financial reporting and accounting. In such a way, it will be possible to maximize the independence of auditors and to demonstrate the transparency of the organization. Furthermore, the non-profit organization should focus on the development of an effective accounting system and financial reporting to make it more transparent and controllable.

Thus, the Sarbanes-Oxley Act of 2002 aims at the prevention of frauds and enhancement of financial reporting of public companies, including non-profit organizations. The latter may need to introduce changes mentioned above to meet requirements of the act.