Sarbanes-Oxley Act’s requirements and Influence on the accounting profession
Abstract
In the recent past, many scandals have affected the accounting profession especially between 2001 and 2002 (Leslie, 2013). Most professionals within the accounting field of accounting felt that the adverse effects caused by these scandals were too huge and as such, surpassed the existing regulatory frameworks. This is why in July 2002, the Sarbanes-Oxley Protection Act, commonly referred to as SOX Act, was ratified in order to transform the accounting profession (Klein, 2003). The SOX Act is one of the most popular laws in the history of America and it affects security issues. Despite the fact that there are no doubts or controversies with regards to the main purpose of the legislation, the act has provoked many debates concerning how effective it will be upon its implementation. At the same time, a decade after its implementation, the act has changed the accounting profession in numerous ways. For example, due to this legislation, auditing committees have gained more autonomy and internal controls have become more effective, and there have been additional costs to companies, just to mention but a few. This research paper seeks to discuss the main facts concerning this act, how it has affected the accounting profession and how it will be implemented in the future. The paper will additionally explore the rations of the act.
Sarbanes-Oxley Act
The SOX Act came into force as a means of responding to high corporate scandals. The Act outlines aspects of business control as well as accounting guideline and concepts that had been fronted way before the scandals came into public light. Despite the fact that in most cases, the Act is only directly applicable in publicly traded companies, most of the ideas within the Act may in due course be applied to private companies as well.
Sarbanes-Oxley came into force as a law in 2002, and some of its premises can only be applied in the companies that meet the requirements of coverage as stipulated under the national securities laws while the rest are just a few corporations with securities declared to trade on state-run exchanges. The main objective of formulating the Act is to boost investor confidence by improving the government guidelines onbookkeeping, coverage, as well as corporate governance of public companies.
Additionally, Sarbanes-Oxley reveals more concerning certain matters and these includecriminal and civil penalties for securities violations as well as considerably longer jail terms and bigger fines for any corporate executives who expressively and intentionally misstate financial statements. The Sarbanes Oxley Act further demands the preparation of independent annual audit reports by all public companies with regards toexistence and condition of internal controls in the financial reporting sector.
Furthermore, according to the Act, companies need to have an internal audit function, which is approved by external auditors. The Act also provides auditors with independence and autonomy and further demands the disclosure of any information and evidence requested at any time that concerns significant transactions and how they are opened, approved, supported, administered and reported.
Sarbanes-Oxley Act also facilitates the collection of enough data and information flow with regards to particular transactions in order to identify where material misstatements due to inaccuracy or fraud could arise. It can also help to generate information and other operations or controls that are intentionally aimed at averting or identifying fraud, including the persons who execute the controls and divides as well as regulates the duties. This act also provides an outline of how the period-end financial reporting practice and controls with regard to the protection of assets, reporting the results of managerial testing and evaluation should be handled.
The essence of this Act lies in its scope and the material shift it spells out in the balance of centralized and government control over corporations.In fact, due to the SOX Act, rules governing corporate governance and business practices have been dramatically redesigned. The Act also formulated accounting boards of five members that would be authorized to set and enforce auditing, certification, attestation, quality control, and ethics standards for public companies.
Requirements of the Act
The SOX Act is a piece of legislation that centers on the security issues and has been said to be one of the most popular Acts in the entire history of the United States of America. Despite the lack of doubt or major controversy concerning the main purpose of the legislation, the act has provoked many debates with regard to its effectiveness after being enforced. This section will give an outline of the requirements of the Act.
First, the Act offers pertinent reforms that are intended to enhance performance and re-establish assurance within the accounting career (Felicia, 2013). The Act further steered the end of self-regulation of the accounting profession in as far as the audit of public companies was concerned. The Act also formed the PCAOB, which was given the authority to reaffirm the role of the board of accounting professionals and also set up an independent funding source for the FASB.
Additionally, the act necessitates that companies ought to establish stronger internal controls and also sets new demands for the CEO and CFOs of public companies and these includes compelling them to personally pledge to release truthful quarterly and annual financial reporting of their companies. The Act also requires specific certifications which catapult the need for executives to not only document the internal control environment within the company, but also to ascertain that the controls enforced are working effectively and a the same time ensure the proper mitigation of business risks. In addition, the law broadens the scope of independence and autonomy for board audit committees (Bloomenthal, 2002). One of the main contributors towards the labyrinth of regulations is the stock exchange that institute specific corporate governance requirements for listed companies.
Generally, the main responsibilities of the Act include:
It sets up a board for public accountinginthe Commission for securities and exchange that monitors the activities of each public accounting firm and further issues standards with regard to accounting practices.
- Establish new standards for commercial panels and Audit Committees;
- Expects the companies to have stronger documented internal control;
- Expects the certification that the quarterly and annual financial reporting of their company is truthful by the CEO and CFOs of public companies
- The Act also has certifications that require the executives to certify making personal pledges that the controls are effectively working
- This Act expects evaluation by public companies of internal controls on annual basis and proper reporting of those findings with SEC filings
- Establishment of fresh standards that affect discipline and accountability as well as criminal fines for corporate managers; and
- Establishment of fresh standards with regards to the scope of autonomy for External Auditors
At the same time, the section 404 of the SOX Act also requires managers in any organization to submit a report regarding the effectiveness of the internal control of their organization (Krishna et al., 2008). The, Act further spells out the follow-up section to this, which is the Auditing Standard NO.2 and which expects the auditor to opine on both the internal control affairs of the client and the evaluation of the controls by the managing company (Krishna et al., 2008). Due to this, the implementation of this section portends additional costs to the companies and actually causes a significant amount of burden to the organizations.
External support of the efforts by bodies like COSO can also be sought in order to come up with an internal control 
framework that is designed for smaller companies. Apart from the cost of implementation as discussed above, there have been reports regarding the the actual or potential costs of the SOX Act and these are used to support the calls for modification or repeal of specific provisions in the Act.
Impacts of the Act
Without a doubt, majority of the companies have reorganized almost every aspect of their accounting committees and boards with the aim of meeting the demands of the new laws and standards for management set by the Act. The new legislation demands the total autonomy of directors of the boards such that they are the only ones responsible for nominations, accounting, auditing, and compensation as well as governance (Peary et al., 2013). It is also well known that there were many questions raised with regards to the transition provisions for the “look-back” in the NY Stock Exchange standards. The law also provides one-year as a transition period and this is not an oversight or anomaly, but rather a solution devised by the Exchange which was approved by management in order to to deal with both the desire, which they strongly advocated, to have a reference point in place during the early stages.This was in contrast to the prior proposals which had provided transitional periods that simply phased out and one of the top concerns in 2004 was the need for some transition flexibility (Peary et al., 2013).
There are disclosure requirements stipulated in the new listing standards which affect independence standards and determinations (Krishna et al., 2008). There are predictions thatin the near future, markets will be examining at the achievement ofcompanies after implementing these new legislation. Similarly, the Commission further adopted new disclosure requirements regarding the processes of nominating committees and shareholder communications with directors in November 2003 (Peary et al., 2013). This implies that companies will have to consider certain criteria in their evaluation of disclosure and this will need to meet both new requirements and those imposed by the recent listing standards.
The Act added reporting and certification tasks to the position of the CFO hence enhancing it in the process. Consequently, the roles of CFOs will be in line with liability equivalent to that of the CEO and due to this additional responsibility, the CFOs will be regarded as the second-in-command in the corporate entity. Companies will have to devise means of working in cross-functional teams so as to ensure the integrity of reporting and effective control of the organization. This will necessitate certain structural changes both in the organization structure and in roles of individuals. The CFO will greatly influence such changes and processes hence they will require to have excellent leadership ability including commitment, visionary, inspirational, and motivational. This has created the demand for the financial and IT departments in different organizations to be furnished with the necessary skills of financial transaction. In addition to the right sets of skills and individuals, reliable internal control as well as information systems will also be required.
Internal audit has been perceived as one of the important tools for carrying assessments with regard to the usefulness of internal control systems (Tysiac, 2012). This particular duty can help an organization to achieve its objectives by creating a systematic, ordered approach to evaluate and also developing the efficiency of hazardsupervision, control, as well as authority processes. Valuation through internal audit must entail regular review of the organization, in terms of its systems, and business procedures and make the necessary recommendations that can enhance effectiveness and efficiency of its operations. Consistency and uprightness of financial and operational information and compliance with laws, guidelines, and contracts have so far been evident.
As essential sources of information and evidence, internal audit deeds and working papers can enable the external auditors when they conduct audits and testimonial processes. Furthermore, the CEO, CFO, and Audit Committee of the Board are bound to depend on internal audit for the organization when conducting the performance assessment of internal control and also in their evaluation of the fairness of financial reports (Krishna et al., 2008). It is therefore necessary for internal audit duties to be undertaken by skilled workforce and business practices sufficient to provide the reliable assurance.
CEOs and CFOs are directly affected by the Sarbanes-Oxley Act because they are expected to confirm the validity and accuracy of many documents including financial and others. This confirmation practice ultimately influences the technology infrastructure that organizations employ and automates the finance, governance, as well as the knowledge management systems. The IT department is responsible for designing and operating a suitable technology framework.
One of the key means that corporations and corporate executives can use to reduce their corporate, and now personal, liabilities is through the enforcement of changes to the IT systems and making sure that these support the compliance and disclosure demands of Sarbanes-Oxley.
Most importantly, the effective SOX regulations have significantly strengthened the roles and assignments of autonomous audit committee in company control. Evidently, such audit committees are performing better than they used to before the enactment of the Sox Act. In the same respect, boards of directors have also enhanced their levels of accountability, while on their part the auditors are stepping up the levels of their cynicism and questioning. In fact, there have been significant improvements in the performances of internal auditor as they are now cooperating with external auditors to ensure the smooth functioning of the internal control processes and networks as was intended.
How Sox will be Implemented in Future
The future of The SOX Act is entirely dependent on the ability of the enterprises to respond to the areas stipulated by the Act by incorporating them as a part of their daily transactions. Current researches reveal that financial stake will depend upon CPA’s support in expanding the ethical regulations provided in the SOX Act. The CPA profession is established in order to serve the public as opposed to individuals in many aspects of business activities and this is why the body ought to search for markets that are ready to invest the capital necessary for facilitating the smooth operations of the companies (Allen and Ennis, 2003).
Deloitte and Touché LLP recently released a new publication named the “Under Control” in which it highlights some pertinent matters regarding this issue and these included education and training to reinforce the control environment, clearly articulated roles and responsibilities as well as assigned accountability, effective and efficient processes for evaluating testing, remediating, monitoring, and reporting on controls. The publication further touches on the aspects of technology which can facilitate core aspects and activities such as compliance, adaptability, and flexibility in response to organizational and regulatory change, integrated financial, and internal control processes. It is apparent that the act may need modifications in the future, but currently it serves to indemnify investors against those that do not or mistakenly fail to report financial aspects accurately.
Since the Act is applied on a gradual basis, the possibility of disproportionate burdens on smaller companies is locked out. However, there is a strong likelihood that the internal control provisions places the greatest relative burdens on smaller companies. This therefore calls for the considerations of size, geographic and other scope or complexity of business that may be relevant for smaller businesses when evaluating the issues of internal control for smaller companies and designing an appropriate framework for evaluating internal control that takes into account such differences. In fact, by adopting release for the internal control requirement, the Commission suggests that there is indeed flexibility in the method of assessments that could be employed by the smaller businesses.
Moreover, there are also possibilities of external support of the efforts by bodies such as COSO to come up with an internal control framework that is designed specifically for smaller companies. Apart from the cost of implementation that was earlier mentioned, some reports about the actual or potential costs of the SOX Act have been used as the basis to support calls for alterations or repeal of certain of its provisions (Allen and Ennis, 2003).
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