The Sarbanes-Oxley Act is officially titled “An act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” The goal of the law was to revise the requirements for the boards of public companies. The boards’ responsibilities were expanded in terms of financial accounting and reporting. The law was adopted after several heavily publicized corporate scandals where large companies were found to have committed accounting fraud. The federal law consists of 66 sections divided into 11 parts.
The first part establishes the public company accounting oversight board. Its major function is to oversee the audit of public companies. The part also specifies the accounting oversight board’s authority to register and control auditors and to ensure independent auditing. Auditor independence is what the second part of the law is dedicated to it prescribes how auditors should be positioned within a corporation to avoid conflicts of interest. For example, auditors are prohibited by the Act to provide accounting services such as bookkeeping or consulting to audit clients.
The third part is about corporate responsibility. It declares that principal officers of a company are responsible for the accuracy and completeness of all financial and accounting reports and statements. The fourth part requires corporations to disclose more information about their financial activities than they had been required previously. The fifth part prescribes the conduct for securities analysts to avoid conflicts of interest for their part. The sixth part describes what legal limitations can be imposed on securities professionals such as brokers or dealers in cases of association with securities analysis. The seventh part requires the securities exchange commission to conduct certain studies in the area of public companies and accounting and report their results.
The eighth part of the law is one of the most widely discussed ones. It establishes criminal punishment for modifying or destroying the financial records of a corporation. Also, section 806 within this part describes what measures should be taken to protect whistle-blowers, i.e. employees of public corporations who report and provide evidence of fraud. The ninth part is another one that drew much attention. It established a higher responsibility for white-collars to report fraud or any kind of manipulation of financial and accounting records. The tenth part requires that the federal income tax return is signed by the CEO of a company. Finally, the eleventh part defines tampering of financial and accounting records as a criminal offense and provides for harder penalties for corporate fraud.
The Sarbanes-Oxley Act has received both positive and negative responses from politicians and professionals. It was praised for enforcing the system where the managers of a corporation serve the needs of the shareholders. The two main goals of the law were to increase investor confidence and ensure more transparent and reliable financial reporting of corporations. The goals were achieved by expanding control over auditing and requiring senior executives to be more involved in the matters of financial reporting.
Certain cases of uncovering corporate frauds in the US since 2002 may be attributed to the adoption of the Sarbanes-Oxley Act. Also, what was particularly praised is establishing the responsibility for employees to report accounting fraud and protecting whistle-blowers. These two provisions in a way redefined corporate ethics toward increased transparency and decreased the risks of fraud within corporations.
However, the law was also criticized for the significant number of strict requirements for US corporations. It is costly and time-consuming to adopt certain policies, practices, and procedures to meet these requirements. Some interactions within corporations became more complicated after the law was adopted. It allows assuming that US corporations thus became less internationally competitive as their internal operation (e.g. auditing) had become more complex.
Also, complying with the Sarbanes-Oxley accounting regulations made it harder to create a public company, which caused recent criticism. After a financial crisis, one of the priorities of the US economy was creating more good jobs, which is difficult if the emergence of employers is obstructed by advanced accounting and financial reporting requirements.
The Sarbanes-Oxley Act appeared as a response to a series of accounting fraud scandals and pursued more transparency of corporations’ financial reporting. There are several takeaways for different involved parties. The board of a public company was given more responsibility for the accuracy and completeness of financial records, reports, and statements. More regulations and restrictions were imposed on the activities of auditors. The law also affected corporations’ employees. The responsibility of those of them who deal with financial records of their employers was enhanced. This responsibility concerns the accounting and financial reporting of corporations.
Although the Sarbanes-Oxley Act is aimed at the positive effect of preventing corporate accounting fraud, it also has some drawbacks. The major disadvantage is that complying with the law complicates the operation of a public company and interactions within it. It may cause some US companies to relocate or stop new ones from being established. One of the major positive effects of the law is that it increased investor confidence by obstructing fraudulent appropriation of funds in US corporations.