Term Paper on "Sarbanes-Oxley Act 2002"

Term Paper 15 pages (4252 words) Sources: 20 Style: APA

[EXCERPT] . . . .

Sarbanes-Oxley Act 2002 is also known as Public Company Accounting Reform and Investor Protection Act of 2002 and is most commonly called SOX or Sarbox. On July 30, 2002 the Act was introduced from United States federal law got a response with various numbers of major corporate and accounting scandals, which were affecting Enron, Peregrine Systems, WorldCom and Tyco International. In result, there was a decline in public trust for accounting and also reporting practices. Sarbanes-Oxley Act is named after the sponsors of the Senator Paul Sarbanes and the representative Michael G. Oxley. It was also planned to punish the corporate and fraud for accounting plus corruption as well which ensure the justice for the people with strong behaviors and to protect the workers and shareholders interest. The law was introduced for new rules with an objective to improve the accuracy and reliability of the disclosures to make the accordance of the security laws, in this way it will protect the investors. It was approved by the cote of 423-3 by the Senate 99-0. The act established new standards for all United States public companies for public accounting firms, management and boards. People who supported this Act believe that the legislation is important and can be useful but on the other hand critics say that it damages the economic even more rather than preventing it. It contains 11 sections including 302, 404, 401, 409, 802 and 906 from the additional Corporate Board responsibilities to criminal penalties. The requirement for this Act is the Securities and Exchange Commission to fulfill the rules which are required by the new law. A new public agency was established due to this Act namely Public Company Accounting Oversight Board or PCAOB which have the responsibility for regulating, disciplining accounting firms for their roles as auditors, inspecting and overseeing. It is found mostly in the area of public and media which focus on creating a clear compliance and motivation. Sarbanes-Oxley Act included various numbers of deadlines, the most important ones are that the companies must meet the financial reports and a certificate for end of any year showing financial statements after November 15, 2004 and small companies plus the foreign companies should meet these mandates for the statements after July 15, 2005. It is not for business practices and does not specify that how should a business store their records but it defines that which of the records should be stored and for how long. (George Pozgar, 2007).

Two different certificates came into effect under Sarbanes-Oxley Act, one civil (Section 302) and the other one is criminal (Section 906). Section 302 requires the Securities and Exchange Commission by SEC which passes rules to chief executive officers and chief financial officers of the public organizations to file the company's annual and quarterly reports to the SEC. They are also responsible for maintaining the internal controls of an organization and to ensure material information which is related to the company and to its consolidated subsidiaries within the entities. Internal controls must be evaluated as of a date within 90 days report. Section 906 comes under criminal penalties which come by civil penalties from Section 302. However, external auditors are required to make an opinion if the effective control over financial reporting was maintained or not by the management. This is an addition for the accuracy of the financial statements although the requirement to make a third opinion was regarding management was removed in 2007. (Linklaters).

Many of the people agree that SOX is the most important part of the legislation which affects the financial disclosure, corporate governance and public accounting. It sweeps the issues of auditors, corporate board members, publicly traded securities and lawyers. As mentioned above that SOX consists of 11 titles with multiple sections are the following,

Title One "Public Company Accounting Oversight Board (PCAOB)"

Sections: 101. Establishment administrative provisions, 102. Registration with the board, 103. Auditing, quality control and independence standards and rules, 104. Inspections of registered public accounting firms, 105. Investigations and disciplinary proceedings, 106. Foreign public accounting firms, 107. Commission oversight of the board, 108. Accounting Standards and 109. funding.

Title Two, "Auditors Independence"

Sections: 201. Services outside the scope of practice of auditors, 202. Pre-approval requirements, 203. Audit partner rotation, 204. Auditor reports to audit committee, 205. Confirming amendments, 206. Conflicts of interest, 207. Study of mandatory rotation of registered public accounting firms, 208. Commission authority, 209. Considerations by appropriate State regulatory authorities.

Title Three, "Corporate Responsibility"

Sections: 301. Public Company audit committees, 302. Corporate responsibility for financial reports, 303. Improper influence for financial reports, 304. Forfeiture of certain bonuses and profits, 305. Officer and director bars and penalties, 306. Insider trade during pension fund blackout periods, 307. Rules of professional responsibility for attorneys and 308. Fair funds for invertors.

Title Four, "Enhanced Financial Disclosures"

Sections: 401. Disclosures in periodic reports, 402. Enhanced conflict of interest provisions, 403. Disclosures of transactions involving management and principal stock holders, 404. Management assessment of internal controls, 405. Exemption, 406. Code of ethics for senior financial officers, 407. Disclosure of audit committee financial expert, 408. Enhanced review of periodic disclosures by issuers and 409. Real time issuer disclosures.

Title Five, "Analyst Conflicts of Interest"

Sections: 501. Treatment of securities analysts by registered securities associations and national securities exchanges.

Title Six, "Commission Resources and Authority"

Sections: 601. Authorization of appropriations, 602. Appearance and practice before the commission, 603. Federal court authority to impose penny stock bars and 604. Qualifications of associated persons of brokers and dealers.

Title Seven, "Studies and Reports"

Sections: 701. GAO study and report regarding consolidation of public accounting firms, 702. Commission study and report regarding credit ranges agencies, 703. Study and report on violators and violations, 704. Study of enforcement actions and 705. Study of investment banks.

Title Eight, "Corporate and Criminal Fraud Accountability"

Sections: 801. Short title, 802. Criminal penalties for altering documents, 803. Debts non-dischargeable if incurred in violation of securities fraud laws, 804. Statute of limitations for securities fraud, 805. Review of federal sentencing guidelines for obstruction of justice and extensive criminal fraud, 806. Protection for employees of publicly traded companies who provide evidence of fraud and 807. Criminal penalties for defrauding share holders of publicly traded companies.

Title Nine, "White Collar Crime Penalty Enhancements"

Sections: 901. Short title, 902. Attempts and conspiracies to commit criminal fraud offenses, 903. Criminal penalties for mail and wire fraud, 904. Criminal penalties for violations of the employees retirements security act of 1974, 905. Amendment to sentencing guideline relating to certain white collar offenses and 906. Corporate responsibility for financial reports.

Title Ten, "Corporate Tax Returns"

Sections: 1001. Sense of the Senate regarding the signing of corporate tax returns by chief executive officers.

Title Eleven, "Corporate Fraud and Accountability"

Sections: 1101. Short title, 1102, Tempering with a record of otherwise impeding an official proceeding, 1103. Temporary freeze authority for the Securities and Exchange Commission, 1104. Amendment to the Federal Sentencing Guidelines, 1105. Authority of the commission to prohibit persons from serving as officers or directors, 1106. Increased criminal penalties under Security Exchange Act of 1934 and 1107. Retaliation against informants. (Public Law)

In the mid of 2000 to 2002, huge corporate frauds occurred due to variety of different factors created by the conditions. There was a high public fraud happened to be at Enron, Tyco and WorldCom with conflicts of interest and compensation. It declined the market value of United States by $500 billion of investments which made almost 95 million Americans into deep problem who owned the stock directly from the companies. The roots which caused the frauds, contribute to the passage of SOX in 2002. Many of the contributing factors and events included the auditing firms and priority to SOX performed consulting work for the companies they audited, as the agreements were much more profitable than the auditing. The entire scenario presented the appearance of a conflict of interest, practice for bonus and stock with unstable stock prices resulted in pressure to manage the earning, decline of technology in 2000 in the overall market made the managers presumed to purchase a technology stock by selling them quietly made the invertors angry due to the losses, audit committees which comes under the category of board of directors who are responsible for the financial reports in United States corporation on the behalf of investors had scandals that proved that the members were not the expertise or did not practiced which resulted that they were not aware or independent of management, on the other hand security analysts did the same issuing a stock and then selling it while presuming which created almost the appearance of a conflict of interest. They are responsible for to analyze that who make buy and sell on the company stocks, help provided for the loads, bankers investments and who provides opportunities for conflicts. Last factor which caused a decline in U.S. overall market is that the bank provided huge loans to the companies, due to this both the investor and… READ MORE

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