The History Of The Sarbanes Oxley Accounting Essay


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The Bursa Malaysia which was formerly known as Kuala Lumpur Stock Exchange. The Bursa Malaysia is an exchange holding company which was agreed under Section 15 of the Capital Markets and Services Act 2007. The company runs a fully combined exchange, proposing the complete series of exchange-related services. This includes trading, clearance, settlement and repository services. There are many public listed companies in the Bursa Malaysia but most of these companies are consider going private for several reasons that the SOX act has affect their companies (An Analysis of Why Public Listed Companies Go Private in Malaysia, Lau Chee Chin, 1998).

The History of the Sarbanes Oxley Act of 2002

The Sarbanes Oxley Act (SOX) of 2002, also known as the Public Accounting Reform and Investor Protection Act was introduced by Senator Paul Sarbanes and Representative Michael Oxley. The act was passed on July 2002 in reply to several reasons. The Sarbanes Oxley Act was created to form new values of corporate responsibilities and forfeits for acts of misconducting. The Sarbanes Oxley Act specifies new financial responsibilities, which includes ensuring the strength of the financial accounts. Misleading the activity of business by jacking up their stock prices which affected the market value was one of the reasons to why Sarbanes Oxley Act was created.

One of the most shocking companies that collapsed was Enron. Before it was bankrupt in 2001, Enron was one of the top companies in United Sates (US) that supplies pulp and paper, gas, electricity and communications. Since the deregulation of the oil and gas industry was form by the government of US, Enron took advantage of it. The company changed its profit and loss reports to the shareholders which encouraged the employees to invest in their stock. Other than that, Enron was using the money from their firm for their personal purposes while reporting fraudulent profit to their investors. In the end, the company went bankrupt because of their fraudulent. This caused the investors to lose all the money that they have invested in the Enron stock. A sight from the Enron scandal, there were also other corporate scandals during that time such as the WorldCom, Adelphia, Global Crossing (parent of the MCI) and Xerox. Later, many traded companies restated their financial reports which lead to a large amount of stock market value disappearing (The Sarbanes-Oxley Act and the Enron Scandal - Why are they Important, Rosemary Peavler).

The Sarbanes Oxley Act is basically applied to companies in the United States (U.S) and also to international companies whose shares are traded on the US stock exchange also known as the Securities and Exchange Commission (SEC) which in this case the Malaysian companies are also forced to follow the SOX act. The Securities and Exchange Commission (SEC) is an agency that is mainly responsible in managing and imposing federal securities laws. The SEC works hard in making sure the investors are protected by ensuring that the securities markets are true and fair. Moreover, the SEC also sets the time limit for submission and publishes rules on requests (What was the Sarbanes Oxley Act of 2002

created and how does it impact the financial reporting today, Charles Hooper, 9th July 2010).

The terms of the act include a very important role for the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of a corporation. The CEO and CFO of a company or corporation are assigned to make sure that their company's records and their financial statements legitimately represent their firm's financial position. Moreover, in order for no misdoing to be occurred, the company management that is under the SOX act must annually state that they are responsible for the financial control within their company.

Many companies' especially small and mid-cap companies are thinking through about going private in the Wall Street which is equal to our Bursa Malaysia because of the high rate of obeying the Sarbanes Oxley Act. The Sarbanes Oxley Act has several requirements. First is the Public Company Accounting Oversight Board (PCAOB) which mainly focuses on auditors. The main powers of the board are to discipline the accounting corporations that are audit registered companies. Moreover, it also sets the standards of the audit and examines the financial misdeeds. Second is the Corporate Responsibilities. It requires the management of a company to be responsible for all that has been stated in the company's financial reports. This responsibility is primarily for the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the company. Third is the Corporate Fraud Accountability which identifies when the corporation records are altered and states the action as criminal offence. At this point, the Securities and Exchange Commission (SEC) have the rights to stop any unusual payments by the corporation.

The effects of the Sarbanes Oxley Act of 2002 on the Malaysian companies listed on Bursa Malaysia

The Sarbanes Oxley Act of 2002 has not only affected the US companies, but it has also greatly affected international countries. Malaysian companies listed on the Bursa Malaysia are also affected by the formation of this act. The act has affected he companies in many ways.

The Effect on the Financial Statements

The SOX act was created to protect investors from companies that do fraudulent activities which may affect the investors and bring them to loss. As has been mentioned earlier, the SOX act has not only affected the US companies but it also has affected the non-US companies that have been under the US companies that follows the SOX act. This also includes Malaysian companies under the Bursa Malaysia. One of the effects of the formation of the SOX act on the Malaysian companies is the financial statements or reports. The financial statements were effected in many ways.

One of the ways is when the SOX act broken down self-regulation of the public accounting companies by establishing Public Company Accounting Oversight Board (PCAOB). PCAOB as mentioned earlier in the history of the SOX act is one of the requirement that was needed by company that is under the SOX act. The PCAOB is directed to investigate firms whose auditors are caught of wrongdoings. The PCOAB is said to be empowered by the Securities and Exchange Commission (SEC). The SOX act also affects the financial statements of the Malaysian companies by removing a large conflict of interest for accounting firms which provided consultation for the company's clients. This was considered illegal in the SOX act. Moreover, a firm that has audit clients is not allowed to give another audit client any consulting service as it was considered as against the regulation of the SOX act. Other than that, there is another conflict interest which is the relationship between the auditors in a firm and the firm's CEO and CFO was removed. This is because it was also considered as against the regulation of the SOX act (What was the Sarbanes Oxley Act of 2002 created and how does it impact the financial reporting today, Charles Hooper, 9th July 2010).

Auditors now have to pass the company's financial reports that they are assigned to do to the audit committee in the Board of Directors of their company instead of the company's executives. This is to make sure there are no wrongdoings to be occurred in the financial reports. Lastly, the SOX act has affected the financial statements of the Malaysian companies under the Bursa Malaysia by the agency problem which is the potential problem of interest concerning a corporate and its executives. This was achieved by requiring the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) to certify the financial reports of their firms. The CEO and CFO have to make sure that they have gone through the reports carefully and are satisfied with it by making sure all financial statements are done accurately and are true. The CEO and CFO plays a big role in this particular rule as they are responsible for all that has been stated in the report and if there is any misdoing found they will be punished for it (What was the Sarbanes Oxley Act of 2002 created and how does it impact the financial reporting today, Charles Hooper, 9th July 2010). .

The SOX act has affected the financial statement of the Malaysian companies as stated above and from the effects; we can see that it has affected the companies in both ways, in a good way and in a bad way. How did it affect the company in a good way? The SOX act rules and regulation has made these companies more aware and to make sure there is no any fraudulent or wrongdoings to be occurred. By this way, investors can assure that they are in good hands and don't have to worry of any fraudulent to occur which will lead them to loss. If there is any fraudulent, it would be easily detected with the help of Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission (SEC). For the bad effects, the company has to go through so many levels in order for them to finalize the statements. Going through this hassle will help them to keep the company's position in a good place and to bring a good name so that the investors will be able to trust the company.

The Effects of the Non- Audit Service, Audit Fees and Auditor Independence

As for the year 2002, United States faced a very big problem which was the biggest corporate collapsed referring to the auditors' independence. Arthur Andersen was the auditor of the three biggest bankruptcies which is Enron, WorldCom and Global Crossing. Andersen was criticised a lot due to the collapses whereby he focused more on non-audit services (NAS) than the whole audit. He have earned just for auditing the non-audit services total about US$3,216.8 million compared to his audit fees which was a total US$2,876.6 million. The growth of the income was increased because of the NAS sector. The collapses gave bad impact for the auditing profession as a whole and badly blamed for focusing more in NAS. There were few changes was introduced to guarantee that audit firms reduced their over-reliance on NAS (The Star, 2002). Moreover, to have a good assurance about the independence of auditors and keeping safe the interest of investors, most of countries has come up with a code that shows the guidelines for auditors' competency and independence in the accounting profession.

In Malaysia, the Malaysian Institute of Accountant (MIA) by Laws (on Professional Conduct and Ethics) have suggested that audit firms should reject any appointments which provide NAS to a client. This is because NAS would create threats to the auditors' professional independence, integrity and objectivity. Furthermore, all listed companies on Bursa Malaysia were required to acknowledge the non-audit fees in their annual reports which were effective June 1, 2001. The objective for these was to protect shareholder's interest and to raise the corporate transparency. This is to practice the same level with other Commonwealth countries such as Australia and the United Kingdom (UK), which had a requirement for non-audit fees of listed companies to be disclosed in the annual report. The earlier years before 2001, the rules in Malaysia was mainly focused on the disclosure of audit fees in the companies' annual required. This was required by the Companies Act 1965.

During the introduction of the Sarbanes-Oxley Act 2002 (SOX 2002) in United States, the ratio of NAS fees to total audit income payments for the listed companies in Malaysia are also provided for descriptive evidence. Therefore, the outcome will be used by the MIA, which the implications of SOX 2002 are still under research before it's been introduced a common rule in Malaysia. In the statement given by the SOX 2002, it was stated that percentage of NAS should not be more than 5% of the total auditor's income payments which need to be provided for a client. If it increases, the client should get pre-approval from its audit committee. The reason is non-audit fees are paid higher of the percentage given, it would be stated as the auditors are not being independent. In Malaysia, under the control of MIA, the rules was effective January 2002, the auditors will be stated as professional independence if the total fees increases from the percentage of NAS to client with 20% or more of the audit firm's total annual fees for two or the next consecutive years. The law of the SOX 2002 it's very important and must be emphasised on the result of NAS to the audit fees. If there is negative relationship between NAS and audit fees then it is caused of the "loss leader" theory. In the other hand, if there is positive relationship between NAS and audit fees it will give a good example for the profession of auditors because of clean audit thus it will create independence for the professions (The Provision of Non- Audit Services, 2006).

The Effect of Penalties

The effect of the formation of the SOX act to the Malaysian companies can also be seen when it impacts the penalties. The act has basically increased the penalties for the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) of a company. It can affect the CEO and CFO through the internal and external controls.

The act considers the wrongdoings or misconducts as criminal offence, for example, when the company's audit or financial reports are altered. This will be considered as wrongdoings as it affects the financial reports of the company. This type of wrong doings will be easily detected by the SEC. The CEO and CFO are mainly affected for the increase in penalties. This is because, there would be the main person to be punished if there is any misdoing found as they are responsible for everything that is stated in the financial reports.

A purposely certified wrongdoing is considered an offence. These offences are punishable by fining or imprisonment up to 10 years. For wilfully given wrongdoing certification is an offence that is able to be punished by fining or sentence for up to 20 years. In addition, for wrongdoings such as alteration of the financial records will be punished by imprisonment for 10 years (The Implementation and the Effects of SOX on Swedish Companies, Gustav Nilsson).

The increase in penalties has its negatives and positives effects too. The penalties show positive effect as it helps the company to be aware of their mistakes and to build trust of investors. This increase in penalties will reduce the amount of misdoing occurred in a company. The negative effect of the penalties is that if any misdoing is occurred the CEO and CFO have to be punished for it. Moreover, they have to face all the punishments that are given to them. If these mistakes continued, the company will lose the trust of the investors and will make the company's name drop.


As for the conclusion, after SOX 2002 was implemented in United States and also to international companies, there was a good and positive result. It was to form good values for corporate responsibilities. Moreover, it is to overcome fraudulent whereby the company need to give a true statement about the profit or loss of the company to the shareholders and attract the investors to invest their shares in the company. SOX 2002 have also ensure that a company's client are not been exploited by paying more non audit services compared to the audit fees. Lastly, SOX 2002 have strengthens the law that the company need to legitimately their financial statements by not giving a false statement.


1., (2006). The Provision of Non-Audit Services. Retrieved from

2. An Analysis of Why Public Listed Companies Go Private in Malaysia, Lau Chee Chin, 1998

3. The Implementation and the Effects of SOX on Swedish Companies, Gustav Nilsson

4. What was the Sarbanes Oxley Act of 2002 created and how does it impact the financial reporting today, Charles Hooper, 9th July 2010

5. The Sarbanes-Oxley Act and the Enron Scandal - Why are they Important?, RosemaryPeavler

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