Sarbanes-Oxley Recommendations

Prepared by: Maged Soliman

Subject: Sarbanes-Oxley recommendations

In this essay I would like to discuss the implications of the Sarbanes-Oxley (SOX) legislation. This essay provides a brief history of SOX’s creation, explains the relationship amongst the FASB, SEC and PCAOB, describes the pros and cons of SOX, assesses the impacts of SOX, and lists ethical considerations of SOX.

History of SOX - the Sarbanes-Oxley Act of 2002 is legislation in response to the high profile financial scandals, such as seen with Enron and WorldCom. The purpose of this act is to protect shareholders and the general public from accounting errors and fraudulent business practices. The Sarbanes-Oxley Act introduced stringent new rules to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Sarbanes-Oxley is not a set of business practices and does not specify how a business should store records; rather, Sarbanes-Oxley defines which records are to be stored and for how long.

The relationship among the FASB, SEC and PCAOB SOX are administered by the Securities and Exchange Commission (SEC). The SEC sets deadlines for compliance and publishes rules on requirements. The Securities and Exchange Commission (SEC) is the department to which all publicly-traded companies, effective since 2004, are required to submit annual reports of the effectiveness of their internal accounting controls. The SEC has broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies. Along with them, is the FASB.

The Financial Accounting Standards Board (FASB), is a professional standards board created by accountants to establish Generally Accepted Accounting Principles (GAAP), which are the accounting standards used by accountants in the U.S. The GAAP reporting method makes it possible for investors and regulatory authorities to accurately determine an organization's financial results.

The Public Company Accounting Oversight Board (PCAOB) was created to oversee the activities of the auditing profession. Specifically to oversee the reforms mandated by the SOX legislation to enhance corporate responsibility, and financial disclosures, plus delete corporate and accounting fraud. The PCAOB is responsible for auditing, quality control, ethics, independence and other standards concerning the preparation of financial records. The Board oversees the audit of public companies that are subject to securities laws. Various sections of SOX requirements include the SEC determining whether the PCOAB is properly organized and has the capacity to carry out its responsibilities under the Act.

Cons of SOX one of the negative aspect of incorporating SOX into a business are that the act requires executives and board members to spend time on formulaic compliance efforts instead of leading their company. In addition, small public companies incur a higher percentage cost than large companies which could be an unfair financial burden, and business groups complain that it is costing them a lot of money and effort to turn up deficiencies that in most cases are inconsequential. Solomon et al. (2005) SOX have also been considered costly due to the updating of information systems in order to comply with reporting requirements. But, non-compliance may result in significant cost, stiff penalties and/or prison sentences.

Pros of SOX on a positive note, many analysts say this Act has made executives focus more attentive on financial records. This has prompted board members to take their work more seriously. Johnson et al. (2005) Disclosures are often more accurate and are produced in a timely manner. SOX increased shareholder value because it underlines the ethical operation of their company. Those who have invested in SOX have largely achieved or improved compliance, with 79 percent of respondents saying their controls are stronger than before the advent of SOX Barlas et al. (2004).

Impact of SOX the act has immediate and profound implications for the behavior and responsibilities of external auditors, management and the audit committee. Plus, even though nothing is explicitly required of internal auditors by SOX, the legislation will change their role within the firm. The act can be seen as an attempt to change the environment in which contracts are written and private behavior occurs. Linsley et al. (2003). The following three points of SOX are examples of the changes: (1) Ensure that the audit committee and the auditors are more independent. (2) Increase the consequences to the audit committee and the auditors if they submit incorrect reports, and (3) Make management formally recognize and accept