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This written assignment will present and discuss the positive and negative effects that Sarbanes Oxley has on publicly traded corporations, the accounting professions, and financial statement users. I will use different resources in order to discuss these two sides and concentrate more in the actual Sarbanes-Oxley Act of 2002. Sarbanes-Oxley was created to improve quality and transparency in financial reporting, independent audits, and accounting services for public companies. SOX was also established to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes. (SOX 2002)
First, I am going to start discussing the positive and negative effects of publicly traded corporations. Based on Sarbanes-Oxley, I found information about publicly traded corporation in Title III, section 302. The regulations states that every commission must report periodically under section 13(a) or 15(d) of the Securities Exchange Act of 1934. The principal executive officer and the principal financial officer performing similar functions must certify in each annual or quarterly report filed or submitted that:
1. It was revised by the one signing it.
2. To make sure that the reports do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements. Making sure that those statements were not false.
3. Based on the officer's knowledge, the financial statements, and other financial information included in the report, reasonably present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report.
4. Whoever is signing (officer) is responsible for establishing and maintaining internal controls, have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known by others entities, particularly during the period in which the periodic reports are being prepared. They have evaluated the effectiveness of the issuer's internal controls as of a date within 90 days prior to the report, and have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date.
5. The signing officers have disclosed to the issuer's auditors and the audit committee all significant deficiencies in the design or operation of internal controls, process, summarize, and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls, and any fraud that involves management or other employees who have a significant role in the issuer's internal controls.
6. The signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. (SOX 2002)
Based on this information, I found that SOX in a positive way, it is trying to be more accurate in regards that every manager or officer is aware of what they are doing. However, we understand that because of SOX cost many corporation have to go trough direct (quantifiable) and indirect (non-quantifiable) costs. (Lowengrub, 2005.) These costs consist in increases in personal liability obligations, associations with internal control improvements, and US financial markets. These will be considering the negative affects.
Second, the accounting professions are found in Title I - sections 101, 106, 108, 109, and Title 7- section 701 of the Sarbanes-Oxley Act of 2002. In Title I Â- section 101 talks about the institution of board which establishes an independent, non-governmental accounting oversight board to oversee the audit of public companies. These companies are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies whose securities are available to public investors. (Shelper, 2002). The board shall be made up of 5 full-time members, only two of which will be certified public accountants. The SEC will appoint members of the Board for a term of 5 years. Section 106 states that Foreign Public Accounting Firms give the Board authority over foreign accounting firms and sets up a structure for which foreign firms are required to comply with Board requests. Section 108 says that the Accounting Standards which give the SEC the authority to approve accounting standard setting bodies that meet specific criteria and calls for a study into the current extent of a principles-based accounting and financial reporting system. Section 109 tells that funding establishes that the Board will be funded through fees from private industry. Moreover, in title VII Â- section 701 is stating that the Government Accountability Office conduct a study and report its findings to Congress within 1 year of enactment date that would examine the reasons for the consolidation of accounting firms since 1989. (Shelper, 2002). The accounting profession will also face additional costs. Conversely, officers can improve their internal controls, board performance, and increase disclosures and reduce costs. While the initial costs of SOX are high, the potential long-term benefits of improved operating will translate into substantial cost savings down the road. (Lowengrub, 2005). The appearance of a public accountant's independence from client manipulation is of critical significance to investor confidence. SOX is trying to give a better way to trust in our accounting professionals. (Strier, 2006)
Third and last, Title I Â- section 102 talks about the financial statement users, where is stated that the corporation must be registered with the board. It is a mandatory registration which begins 180 days after the date of the determination of the Commission. It shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer. A public accounting firm shall have or submit a list of all accountants associated with the firm who participate in or contribute to the preparation of audit reports, stating the license or certification number of each such person, as well as the State license numbers of the firm itself. Copies of any periodic or annual disclosure filed by an issuer with the Commission during the immediately preceding calendar year which discloses accounting disagreements between such issuer and the firm in connection with an audit report furnished or prepared by the firm for such issuer and any other information as the rules of the Board or the Commission shall specify as necessary or appropriate in the public interest or for the protection of investors. Periodic report should submit an annual report to the Board, and may be required to report updated information which was contained in its application. Every annual report required by this subsection must be made available for public inspection, subject to rules of the Board or the Commission, and to applicable laws relating to the confidentiality of proprietary, personal, or other information contained in such applications or reports. Subsequently, the Board shall protect from public disclosure information reasonably identified by the subject accounting firm as proprietary information. Large accounting firms must do an annual review, while small ones have to do a review every three years. Companies that are investing in appropriate internal controls not necessarily have accurate or correct financial statements; however, it might benefit of a good management information system. Most of the investors had lost faith in their investments; subsequently, they start losing
clarity. SOX is trying to provide better results giving these rules, so companies can be more accurate in their financial information.
In Conclusion, SOX might have positive and negative effects. Nevertheless, the different and big problems of past years do not present satisfactory reasons to decline or remove SOX requirements or to adopt significant exemptions based on company size. Moreover, SOX compliance is mandatory for public corporations and thus resources must be allocated to its implementation.
AICPA. 2002. Summary of Sarbanes-Oxley Act of 2002. aicpa.org. Retrieved July 1, 2006 from http://www.aicpa.org/info/sabarnes_oxley_summary.htm
Franklin Strier. 2006. Proposal to Improve theimage for the Public Accounting Profession. The CPA Journal. Retreved July 9, 2006 from http://www.nysscpa.org/printversions/cpaj/2006/306/p67.htm
Paul Lowengrub. 2005. The Impact of Sarbanes Oxley on Companies, Investors, & Financial Markets. Sarbanes-Oxley Compliance Journal. Retrieved July 1, 2006 from http://www.s-ox.com/Feature/detail.cfm?ArticleID=1385
Oxley. 2002. Conference Report. 107th Congress Report "2d Session HOUSE REPRESENTATIVES ! 107-610 SARBANES-OXLEY ACT OF 2002. Retrieved from Sarbanes-Oxley Act of 2002.
Bob Shelper. 2002 Sarbanes-Oxley Act of 2002. fei.org. Retrieved February 8, 2006 from http://www.fei.org/download/shepleranalze.pdf