Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

Introduction

The Sarbanes-Oxley Act of 2002, widely known as SOX, is a federal law in the U.S. enacted as a legislative response to curb corporate scandals and protect investors against fraudulent activities. The act extended existing requirements and further created new ones that public accounting firms, public company boards and management firms were obligated to uphold. Some of the acts provisions are also applicable to private companies. Enron, WorldCom and Tyco were among the biggest names involved in the past corporate and accounting scandals that led to the legislative response. The Act was sponsored by Us Senator Paul Sarbanes and US Representative Michael G Oxley, from it got its name. It comprises of eleven lengthy sections covering a wide range of responsibilities and requirements for different sectors involved with public corporations and financial statements.

Analyze the intent of the Sarbanes OxleyActof 2002 (SOX).

The SOX was created with certain key intents in mind. The primary intent is to protect shareholders from fraudulent activities such as in representations of financial statements. Another intent is to strengthen corporate oversight through extended and newly introduced responsibilities and requirements. Thirdly, the SOX intends to enhance internal corporate control through provisions stipulated in the Act. Lastly, the act envisioned to enhance corporate governance in general, thus restoring faith in investors. With the achievement of these intents, the investors are assured that they are relying on truthful financial information which has been evaluated and verified by an independent third party. Due to its dedication in protecting the investors, the act has been rendered as being a key piece of security in preventing major corporation scandals.

 What is the major drawback of the SOX Act?

Since the inception of the act, many benefits have been realized. However, the act has experienced major drawbacks and has been spoken out against in many cases with questions being raised on its effectiveness. Of all the drawbacks, an increase in the cost of doing business is the most significant. This has resulted from the fact that most of all the other drawbacks are in part related to influence on the costs incurred. Lombardo (2017) states that the act compels federal auditors to take more time in completing the process since they are required to be very detailed. With increased auditing time, the auditing fees also go high.  Vitez (2017) adds to this by affirming that the public corporations are obligated by SOX guidelines to carry out an annual audit annually. The guidelines also asserts that the audit is to be done by a third-party, with each limited on the total accounting services it can perform. In most cases, this leads to hiring more than one auditing firm, thus leading to additional costs.

The added regulatory measures have also led to an increase in the cost of doing business. Regulatory control and added individual responsibility leads to higher administration costs (Lombardo, 2017). The regulations also leads to a slowed pace for the business thus impacting the production. Internal control, a major XOX compliance, have also affected the cost of production. Each accounting operation is required to have a specific internal control to facilitate safeguarding the company’s financial information (Vitez, 2017).  The numerous internal controls leads to additional processing time thus affecting the overall financial information. In addition, employees are strictly required to ensure accuracy and approval of their paperwork by supervisors. When all these are put together, it is evident that the entire process is slowed down, leading to delays and more costs being incurred.

references

Lombardo, C. (2017). Sarbanes-Oxley Act Pros and Cons – Vision LaunchVision Launch. Retrieved 6 November 2017, from http://visionlaunch.com/sarbanes-oxley-act-pros-and-cons/#

Vitez, O. (2017). What Are the Disadvantages of Sarbanes Oxley? | Sapling.comSapling.com. Retrieved 6 November 2017, from https://www.sapling.com/5494421/disadvantages-sarbanes-oxley 

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