Sarbanes - Oxley Act of 2002

Sarbanes- Oxley Act of 2002

The financial markets in the United States are enormous, which involves a myriad of businesses and people. For this reason, there are many laws and regulations set to protect businesses and the people that put their trust in the companies. The world is a changing place with technology and the economy and is the cause of implementing new laws and updating some of the old regulations. The result of the large corporate financial scandals like Enron, WorldCom, Global Crossing and Arthur Andersen, resulted in a loss of public trust in accounting and reporting practices. Corporate greed and corruption has changed the face of American business forever. Corporate greed was the primary factor in the downfall of Enron, Global Crossing and MCI WorldCom. Furthermore, these scandals have led to one of the most significant change to federal securities laws in a long time. The Sarbanes-Oxley Act of 2002 was sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley and became effective in 2004, all publicly-traded companies are required to submit an annual report of the effectiveness of their internal accounting controls to the SEC. One of the primary components of the Sarbanes-Oxley Act is Section 404, which requires a management assessment of internal controls for financial reporting. This makes managers responsible for maintaining an “adequate internal control structure and procedures for financial reporting”; and demands that companies' auditors “attest” to the management's assessment of these controls and disclose any “material weaknesses”. Provisions of the Sarbanes Oxley Act (SOX) detail criminal and civil penalties for noncompliance, certification of internal auditing, and increased financial disclosure. There are many concerns with the Sarbanes-Oxley Act, the main one is the cost increase that companies are facing because of the new filling procedures that are required for their yearly audits.

Sarbanes-Oxley Act (SOX) has increased the auditing costs by $1.4 billion, collectively, for Fortune 1000 firms based on figures reported as of April 27, 2005. Two professors at the University of Nebraska-Omaha (UNO), report that 633 Fortune 1000 firms have paid more than $3.6 billion for 2004 audits so far, compared to $2.2 billion the previous year. To comply with SOX, public firms, including those in the Fortune 1000, were required to complete their first audit of internal controls as well as audits of their historical financial statements, in 2004. The Securities and Exchange Commission (SEC) previously estimated that internal controls requirements costs would add $91,000 to auditing costs excluding the fees for internal control audits. At $2.2 million, the average audit fee was considerably higher than SEC estimates. Audit fee increases are only part of the effect SOX compliance has had on publicly traded companies, however, not all increases in audit fees are attributable to SOX, according to the UNO professors. AMR Research Inc. in Boston estimates that the average company will blow through about $1 million in Sarbanes-Oxley costs per $1 billion in revenue, just to do what analyst John Hagerty calls "a document