Ethics Article Review

Article Summary

The article being reviewed is called, “Sarbanes-Oxley: Beyond Public Companies” written by William H. Wiersema. Investors in the Stock Market rely on financial information issued by public companies for investment decisions. In order to protect the investors Congress passed the Sarbenes-Oxley Act in 2002. Investors need protection and the Act regulates many areas of corporate governance, which among other things requires top management to assume a higher level of formal responsibility. According to the article, management cannot absolve themselves of the responsibility for the company's financial information. Management must also establish a system of checks and balances by introducing independent parties into corporate governance. The Act also requires a greater emphasis on preventing fraud. Keeping companies ethical benefits the stakeholders.

The Act may create a new standard of internal controls applicable to all corporations, even in absence of legislation. The Act further specifies that regulators and legislators in each state should determine how to apply the rules to private companies locally. Sarbenes-Oxley has broadened the role of auditors. While internal control has always been part of auditing, the new specific reporting requirements take things much further. In addition to an audit report, a report on a company's system of internal control is now also required. The Act established the Public Company Accounting Oversight Board. An essential element of the Act is the independence of the accounting firm providing audit services. In addition to requiring the accounting firms to maintain independence, the Act requires public companies to keep its Board of Directors, and the Audit Committee of the Board of Directors independent as well. The Audit Committee must include an independent financial expert, to assure that the Board has adequate understanding to be able perform related functions. Personal responsibility of company officers and directors is also emphasized, as they were perceived as lax in the past. Officers and directors also must sign to formally certify that the financial statements are accurate and that the company's internal control system is adequate. This new requirement also must be understood in the context of major financial frauds. The vast majority of scandals have involved high-level managers, particularly CEO's and CFO's. The Act is in place to regulate and protect companies and their stakeholders so that scandals like ENRON will not happen again.

Article Vs Assigned readings

The article covers the main aspects of ethics in accounting and how past experiences such as ENRON have forced the government to create legislation to protect stakeholders. The Sarbanes-Oxley Act is essential for today's accounting practices. The reading assignments have explained some basic accounting practices and understanding these practices along with the Act will help me to understand my companies accounting policies.

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