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Before the Sarbanes-Oxley Act companies took advantage of the various loopholes that the system failed to address regarding corporate accountability. The financial reporting scandals that are Enron and WorldCom emerged as a result of our flawed system. Corporate reform was necessary in an effort to help close these loopholes eventually paving the way for the Sarbanes-Oxley Act to be born. This paper identifies the main issues, the methods the act devised to properly address these issues, and whether these methods were proven to effectively solve the issues and ultimately increase corporate accountability in a world where corporate accountability appeared to be at an all-time low.
Quality of corporate reporting
The preparation of misleading or fraudulent financial reports was infamously demonstrated through both Enron and WorldCom. Both companies went about it with a different approach. The goal in mind was the same however - to create the illusion of a healthy company with upside for the purposes of improving access to capital. Enron executives hid debt (to make Enron look more profitable) and engaged in off-balance sheet partnerships. WorldCom executives capitalized what should have been operating expenses. A lack of corporate accountability allowed this to happen. The quality of financial reports was suffering and investor confidence was low. Lawmakers, regulators, politicians and other parties demanded something be done to address the abuse that was going on. The protection of the public interest and the return of quality financial reports (through more disclosures) would surely be a step in the right direction.
The Sarbanes-Oxley Act was introduced to address these very concerns. The act introduced a provision for the certification of the financial statements by the top executives of a company as a way to induce corporate accountability. Under this provision top executives were required to sign off on the accuracy and legitimacy of their company's financial reports. In the event something was to go wrong, it put a face on the parties responsible. It not only made them liable, but it also helped ensure that these parties exercise a high duty of care, putting their company's interests ahead of their own, not the other way around. In addition, their reputations and position is in jeopardy if they knowingly signed fraudulent documents. The certification provision has been effective in helping regulators get closer to closing one loophole: producing fraudulent reports that would compromise their company's integrity (as well as their own).
Auditing Internal Control and elimination of conflict of interest
Achieving auditor independence is another issue the Sarbanes-Oxley Act tries to resolve. Auditors act as independent professionals responsible for evaluating an entity's books and ensuring their financial reports coincide with actual economic events during the recorded period. They provide assurance to the public by ensuring the quality of an entity's financial reports, internal control mechanisms and its accuracy. Corporate accountability prior to the act did not aggressively target auditors who were not independent of the firms they provide assurance for. In other words, they would be caught in a conflict of interest that would harm their ability to perform their duties. For major accounting firms, consulting income is much more than auditing income. Accounting firms provide consulting services including bookkeeping and installation accounting technology system to clients, meanwhile providing auditing services at year end. These public accounting firms audit their own books. The SEC required outside public accountant to audit company's financial reports to ensure the validity and reliability of financial information. It is apparently meaningless if the auditors audit their own work and pick out their own mistakes just like it would be for a student to mark his or her own essay. Under title II of the Sarbanes-Oxley Act, it was clearly indicated to increase the level of auditor independence. Auditing firms should not provide consulting services to audit clients, including bookkeeping and accounting information system. In addition, the act requests auditing firms to rotate audit companies. By doing so is to maximum eliminate the subjectivity of public accounting firms.
Maintaining proper internal control helps to increase company efficiency and effectiveness of accounting system. Collapses of Enron and WorldCom are examples of failure of internal control. Enron used SPE's to hide its debt off balance sheet finally caused bankruptcy. WorldCom overstated profit by 3.8 billion, which caused the trading price of WorldCom stock fell from $60 to $1. The company filed bankruptcy and 85,000 employees lost their jobs.  Enron and WorldCom have used the same auditor, Arthur Anderson. As an auditor, Anderson admitted that they had never indicated they improperly bookkeeping of WorldCom overstated profit. Under title I of Sarbanes-Oxley Act, Public Company Accounting Oversight Board was created to protect investors by supervising public companies' auditors. Different from the former one, new act emphasizes internal control auditing. Auditors should follow the new standards issued by Public Company Accounting Oversight Board to attest the effectiveness of a corporation's internal control.
Arthur Anderson, auditor of Enron and WorldCom, faced pressure from public and surrendered license to CPA.  The company was once the "big-five", now was famous as misleading financial reports scandals. Sarbanes-Oxley Act set up new standards to overseen auditing firms to increase quality of their work. Not only public interest will benefit from the high quality of auditing work, the auditing firm itself has been protected under the act.
Prevent bankruptcy caused by fraud accounting, another Enron case
The Sarbanes-Oxley Act attempts to provide a means to safeguard against another Enron or WorldCom disaster (Paine et. al). Legislators, elected officials, and other parties with a desire to preserve the public interest sought to draft a bill in response to what happened with Enron and WorldCom (Paine et. al). These parties were vested in ensuring that companies learn from the mistakes that were committed by these two companies. With the goal of establishing increased corporate accountability in the wake of the Enron and WorldCom collapses in the minds of all aforementioned parties, the act would introduce (at the very least enhance) several new features as measures of prevention (Paine et. al). Harsher criminal penalties for corporate executives; extensions on the statute of limitations; protection for whistleblowers; demanding corporate lawyers to report securities fraud to the company board of directors and company officers; and banning companies from making loans to officers and directors highlight some of the new features addressed by the act to combat the lack of corporate accountability at a time where corporate accountability appeared to be an all-time low.
Each of the above mentioned elements had a positive effect on the Act and helped contribute to improving corporate accountability (Paine et. al). Firstly, harsher criminal penalties meant that corporate executives caught producing fraudulent or misleading financial reports could face a jail term of up to 25 years (Paine et. al). It was placed in the act to deter corporate executives from committing said acts by holding them liable for it because they are ultimately responsible for overseeing the release of their company's financial reports. Secondly, the extension of the statute of limitations was a great way to allow the authorities more time to investigate companies for suspicious wrong doings with regard to financial reporting (Paine et. al). Thirdly, granting whistleblower protection encourages corporate employees to come forward with evidence of corporate misbehaviours without the fear of retaliation by their employers or other parties with an interest in hiding the misbehaviour (Paine et. al). Fourthly, the Act now places an onus on corporate lawyers to ensure securities fraud is reported to the proper authorities whereas prior to the act such information did not require disclosure (Paine et. al). The increased disclosure placed on corporate lawyers would open the door for parties to act on the information and arrive at a resolution to deal with the matter promptly. Lastly, the act helps to reduce conflicts of interest by prohibiting loans made out to officers and directors of the company (Paine et. al). By limiting these vested interests officers and directors should now operate in ways that place the interests of the company ahead of their own.
I would argue that the act takes the necessary preventative measures to avoid another Enron, WorldCom catastrophe. It tries to ensure that companies recognize the importance of compliance (with the act) and realize that compliance creates benefits that outweigh the costs of incompliance. The costs of incompliance are now too steep to ever warrant consideration. The merits of compliance help the corporate sector move closer towards a more accountable business environment that honours integrity and the protection of the public interest.
Several different provisions to solve the same issue
The act raises another issue that involves several provisions that are sought to address the same issue (Paine et. al). The lack of coherence on an issue is due to conflicting opinions during the drafting process over how compliance should be approached and this is because before the bill becomes an act it is subject to extensive critiques and revisions that the initial intent of the amendments within the act results in confusion when it comes to financial reporting notwithstanding the voting that also must take place in the house and senate (Paine et. al). This confusion then leads to inefficiencies and inefficiencies incur added costs and added costs often trickle down to be assumed by the general public.
For instance, a provision in the Sarbanes-Oxley Act declares company officers or executives to certify the accuracy and legitimacy of their company's financial reports before they are released to the general public (Paine et. al). The intent of this provision is laced three different sections of the act, section 302, 404, and 906. Section 302 demands top executives to certify their annual reports, maintain "effective internal controls", and ensure their reports fairly present company's financial information and operations. Section 404 simply requires annual reports to have a thorough internal control report. Section 906 then requires top executives to certify reports that fairly depict the company's financial situation and the result of their operations. These three sections are demonstrably analogous to a student who seeks to travel fifteen kilometers to school and considers three modes of transportation: running, cycling, or driving. The student then opts to run, cycle, and drive five kilometers each rather than pursue one method, say driving for 15 kilometers for the sake of efficiency and coherence. The example illustrates a lack of coherence or doing something one particular way is nonetheless possible but the bottom line is it results in inefficiency and more costs.
In conclusion, the Sarbanes-Oxley Act brought about significant change to the financial reporting standards that were in existence. It was an initiative that was deemed necessary to be undertaken to correct the mistakes that were made in the past. Increasing corporate accountability and oversight in the financial reporting process was seen as the underlying theme for all the issues the act tries to address. The act does appear to do what it was set out to achieve in most areas, such as improving the quality of financial reporting, internal control, and corporate governance. This is not to stay there is not room for improvement. Politics and a lack of coherence stand in the way of making the act something truly magnificent. Nevertheless, the Sarbanes-Oxley Act has left a significant impact on the perception of corporate accountability, corporate governance, and restoring the confidence of the public interest.