Running Head: The SOX Effect

The SOX Effect

SOX and Its Impacts

Long Nguyen

11/14/2012Professor Michael Ortman

Acc403 - Auditing

P a g e | 1

The SOX EffectSOX and Its Impacts

The Sarbanes-Oxley Act was enacted in 2002 and became mandatory for all types of companies to comply. The law introduced major changes to the regulation of financial practice and corporate governance. The law was named after Senator Paul Sarbanes and Congressman Michael Oxley. The law is divided into eleven titles; however, due to the nature of this essay, only sections 302, 401, 404, 409, 802, and 906 will be discussed because they are the most important sections that are relevant with auditing compliance.1. Evaluate the effectiveness of regulations such as Sarbanes-Oxley Act over minimizing the corporate fraud and protecting investors and make one (1) suggestion for improvement.

Sarbanes-Oxley Act (SOA) has certainly helped with minimizing the corporate fraud and protecting investors as its guidelines impose.

Section 302 ensures that all corporations must take the responsibility in all of their financial reports which must comply with all requirements. This enforcement is necessary to make sure that corporations will take responsibility in any decision that they make because they made those choices.

Section 401 is to ensure that all financial statements are to be presented with correct information, without any misinterpretation, or to admit to any material data. It is crucial that no false information shall be included in any financial statements because that will mislead whoever relies on them.

Section 404 entails self-assessment of internal controls and how effective and adequate the current internal controls are. This section is just as important because self-reflection can keep a person grounded; it is important that this section is included in the SOA.

Section 409 ensures that information on financial condition, operation, or material changes must be disclosed to the public, and the information must be presented in a manner that is clear and easy to understand. This section is a significant complement to the entire SOA transforming corporate financial documents into something that are more accessible and easier to understand.

The last section 802 assures the punishments and consequences for those who do not comply with the SOA.

The SOA sections above really ensure that corporations take responsibility in what they do and assure investors about their investments with truthful information. Besides, SOA seems to lower the corporate fraud and protect investor when Chris Cox, chairman of the Securities and Exchange Commission, states publicly on NPR that the number of private securities class action suits (one way to measure the effectiveness of SOA) has gone down compared to a few years back (Steve Inskeep and Renee Montagne, 2007). It is appropriate to say that SOA is effective in lowering the corporate fraud and protecting investors.

Regardless of its effectiveness over the years, section 802, on punishments and consequences, should be constantly updated to ensure the punishments and consequences are appropriate, and that corporations will take it seriously before they succumb to illegal activities.2. Given the oversight of the accounting profession by the PCAOB as a result of the Sarbanes-Oxley Act, assess the impact on auditing firms and the public accounting professions.

P a g e | 2

In his article in the Accounting Today, Michael Cohn quotes from a survey of the Financial Executives International that public companies report a 5 percent increase and private companies has a 7 percent increase in their fees paid to external auditors in the previous year. This means that auditing firms has additional revenue coming from this rise in fees. It is obvious that the stricter in regulations the more details auditing firms must inspect in their audit; hence the rise in fees. It makes more sense in a way that all companies are playing by rules established by a central and neutral authority whose responsibility is divided equally between all parties involved. The accounting profession inevitably has become more necessary and in a higher demand after the SOX enacted in 2002.3. Offer your opinion as to whether or not you believe the accounting profession is better off being self or government regulated with regard to a firm’s ability to detect and report corporate fraud. Support for your position.

The accounting is better off being governed by the government because it is only fair when a neutral entity governs and being able to be unbiased in enforcing the regulations. It is, without a doubt, the only fair way to have the government oversees the accounting profession with regards to able to detect and report corporate fraud. If accounting was self-regulated, there would be no common rules for everyone to follow; or better yet with money, corporations could be “excluded” from whatever rules there were any existing rules. There would be no one like the government who can stay neutral and make sure that it is fair for everyone to enter the business world.

According to a report by Ernst & Young (quoted by Michael Cohn, July 2012), SOX has definitely helped strengthened corporate governance and improved audit quality since it was enacted in 2002. There is evidence in which a series of accounting scandals at major companies like Enron, WorldCom, Tyco, and of course the infamous auditing firm Arthur Andersen to support the previous statement. In the same article by Cohn, he mentions that audit quality has been improved significantly because of the independence of auditors, audit committees, audit oversight authorities, public company shareholders, and most importantly the PCAOB inspections and standard setting. 4. Predict whether or not corporate fraud will be reduced, increase, or remain the same based on requirements for audits of publicly traded companies as prescribed in the Sarbanes-Oxley Act. Support your position.

In many studies of many groups included in Ernst & Young’s report cites that there is enough evidence to indicate improvements in both quality audit and corporate governance over the past decade. More audit committees now include more financial experts compared to the past. Companies that comply with all the internal control provisions in SOX are less likely yo issue financial restatements. In fact, a study of Audit Analytics in 2009 had found that the rate of financial restatements was 46 percent higher for companies who did not comply with all the SOX internal control provisions. In addition, corporate governance is much stronger. Before SOX was enacted, the selection and assessment of the independent auditor were completed by the management. After SOX, audit committees play an important role in corporate governance framework by overseeing both the quality and integrity of company financial statements. After all, it is most likely that corporate fraud will be reduced based on the requirements for audits of publicly traded companies.

Conclusion

P a g e | 3

The enactment of SOX in 2002 which ended 100 years of self-regulation and established the independent oversight of public company audited by the PCAOB was the right decision for the accounting profession.

P a g e | 4

ReferencesAddison-Hewitt Associates, 2006. “The Sarbanes-Oxley Act.” Retrieved on November 11th 2012

from http://www.soxlaw.com/Cohn, Michael, June 26th 2012. “Companies See Rise in Audit Fees.” Accounting Today.

Retrieved on November 14th 2012 from http://www.accountingtoday.com/news/audit-fees-rise-fei-63130-1.html

Cohn, Michael, July 11th 2012. “SOX Improved Corporate Governance and Audit Quality.” Accounting Today. Retrieved on November 14th 2012 from http://www.accountingtoday.com/news/sarbanes-oxley-audits-corporate-governance-ernst-young-63261-1.html

Inskeep, Steve and Montagne, Renee, August 7 2007. “Sarbanes-Oxley Lowers Corporate Fraud Lawsuits.” National Public Radio (NPR). Retrieved on October 17th 2012 from http://www.npr.org/templates/story/story.php?storyId=12555895