Sarbanes Oxley Act
However, this is not always the case for many organizations. Available statistical evidence clearly shows an eminent existence of corporate and accounting scandals in these organizations. Such practices mainly involve the publication of corrupted financial statements by corporations for the purposes of attacking investors.
The Sarbanes Oxley Act of 2002 was enacted in response to eminent financial scandals which saw the collapsing of major corporations between 2000 and 2002 in America, leading to loss of billions of dollars of investors money in the securities markets. Such corporations include Enron, Tyco International and WorldCom among others. The Sarbanes Oxley Act seeks to enhance accountability standards for public corporation boards and management as well as public auditing and accounting firms.
This paper gives a discussion on the origin, enactment, and implementation of the Sarbanes Oxley Act of 2002. The author takes a look at the main events which led to the Sarbanes Oxley Act. A summary on the core provisions of the law is also given.
The introduction of the Sarbanes Oxley Act
The Sarbanes Oxley Act was enacted on July 25, 2002 after it received an overwhelming victory both in The House of Representative, Congress, and the Senate. The act was then signed into law on by the then president, George W. Bush citing it as a milestone in the realization of business practices reforms in the American republic. However, prior to the enactment of the Sarbanes Oxley Act, the two legislative houses had passed two different bills.
On April 24, 2002, the congress enormously passed the Corporate and Auditing Accountability, Responsibility, and Transparency Act and referred it to the Senate Banking Committee. Nevertheless, the then chairman of the committee was working on the Senate Bill 2673 proposal which was successfully approved without objection by the Senate Banking Committee later on June 18, 2002. Due to such divisions between the House of Representatives and the Senate a committee was formed to reconcile both bills.
According to available evidence, the conference committee mainly relied on the provisions of Sarbanes bill, making changes to strengthen its provisions while adding new prescriptions. The committee presented the reconciled final bill by the name Sarbanes-Oxley. The final bill was passed without amendments by both the House of Representatives and the Senate.
The events that led to enactment and implementation of the Sarbanes Oxley Act
The period between 2000 and 2002 saw the collapsing of major public corporations in the United States of America. Such corporations included Enron, WorldCom, Tyco International, Peregrine Systems and Adelphia. Being listed in the nations stock markets, these corporations had previously attracted a large pool of investors. Therefore, upon their fall billions of dollars were lost by investors. Still, banks had fallen victims of the downfall due to the large amount of loans they had lend to this firms. This meant that they had to compromise their customer service in the quest of compensating these loans.
The passing and signing into law of the Sarbanes Oxley Act of 2002 was heavily triggered by the Enron financial accounting fraudulence scandal. The much publicity of fraud activities involving corporation like Enron, WorldCom, and Tyco led to investigations and a number of hearings by the Senate Banking Committee in a bid to uncover the source of the scandal. By 2002, most of the collapsing corporations likes WorldCom publicly claimed having corrupted their financial statements, a concern which expressed conflict of interest compensation practices in the stock exchange market. According to Senator Sarbanes the Senate Banking Committees identified a number of complex causes of the scandals. Some of these contentious roots issues include
First, there existed an auditor conflict of interest. This was because traditionally auditors were self-regulated in their duties. Due to lack of an independent regulating agency, auditing firms constantly engaged with the companies on consultancy agreements. Still established is that such consultancy contracts were more profitable to the firms than their core auditing business (Romano, 2005). Based on this, auditing firm could not question much on erroneous financial reports of the corporations due to fear of their loosing consultancy contracts.
Another event is that the board of directors of these corporations had failed to provide reliable oversight of the financial processing and reporting by the organizations (Romano, 2005). According to the corporate act of the United States, audit committee, which forms part of the board of directors, acts to ensure accuracy and reliability of financial reports on behalf of investors. This report claimed that some members of the board either did not have the right qualifications for the post or failed to exercise their responsibilities. This was still attributed to possible lack of independence between the audit committee and the corporation management.
The banking sector and its large loaning to the companies without analyzing the implication is also cited as a reason behind the passing of the Sarbanes Oxley Act. Loan borrowing symbolizes the potential down fall if an investment. However, despite this fact, banks decided to give large loans to corporations like Enron, an act which greatly cost account holders after the collapsing of the company. The executive compensation practices which provides stock options and bonus to corporations upon meeting set targets was also a reason to the enactment of the Sarbanes Oxley Act. This is because traditional stock exchange award practices tempted corporate managers to engage in meeting set targets despite the associated stock-based bonus risks.
Still, lack of sufficient funding to they Securities Exchange Commission was seen to compromise its efficiency. There also existed a conflict of interest among the securities analysts. Securities analysts, just like auditors, traditionally involved in many contradictory contracts with corporations. However, most of the non-core contracts earned them than the core activities an act which greatly compromised their reliable provision of corrections and advise to the corporations. Ill advice by some mutual fund managers on stock buying and selling was a major cause to great investment loss by investors. Just to be stated here is the fact that investor are mainly guided by investment advices of mutual fund managers. Therefore, failure by these managers to give accurate and reliable information is a major risk to investors.
A summary of the key provisions of the Sarbanes Oxley Act
In the quest by the federal government to ensure accountability of financial report processing in corporations, the Sarbanes Oxley Act of 2002 was passed into law. In summary, the law dictates for the creation of a public company accounting oversight board which will ensure independence of public accounting firms. The board is also responsible for registering and supervising auditors as well as formulating compliance audit procedures. In a move to realize auditor independence, the law dictates for rotational auditing by firms. Auditing firms are prohibited from engaging in non-auditing practices with corporations. This will reduces chances of inside dealings between management and auditors.
Other provisions include mandatory individual responsibility by senior executives for the accuracy financial reports. Securities analysts are bound by a new code of conduct which provides for reporting of any conflict of interest. The securities exchange commission authority is given the mandate to bar securities analysts from practicing under set conditions. Since fraud is a crime in the American nation, the new law enhances white collar crime and fraud accountability penalties. All these provisions of the Sarbanes Oxley Act laws seek to ensure more accountability in the financial reporting by corporations and public auditing firms.
Conclusion
The ultimate success of an investor is dependent on the reliability of the financial statements they get from organization. This is because these statements influence the investor decision making process. Therefore, failure to have in place a reliable public auditing policy greatly compromises investments and the nations condom in general.
This is the reason why the Sarbanes Oxley Act is seen to be of great importance in reforming Americans business practices. The law improves on accuracy and authenticity of published financial reports. It also gives auditors independence while giving individual responsibility of financial statement accuracy to senior corporation executives.
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