The Implications of the Sarbanes Oxley Act on the Accounting Profession Abstract On July 30, 2002, the Sarbanes Oxley Act (also known as SOX) was signed into law by President George W. Bush. The Sarbanes Oxley Act of 2002 is a federal law that set new or improved standards for all U. S. public company boards, management and public accounting firms. Covered in the eleven titles are additional corporate board responsibilities, auditing requirements and criminal penalties. This essay reviews the implications of the Sarbanes Oxley Act on the accounting profession.
The Implications of the Sarbanes Oxley Act on the Accounting Profession President George W. Bush signed the Sarbanes Oxley Act into law on July 30, 2002. This law set new and enhanced standards for public companies and the boards, management and accounting firms. The Sarbanes Oxley Act also brought about considerable changes to the financial reporting and auditing practices of public companies. The act holds top executives for these companies personally responsible for the financial data and its timeliness, with non-compliance having criminal consequences (Trivoli, 2004).
The Sarbanes Oxley Act (also known as SOX) created a new agency, the Public Company Accounting Oversight Board (or PCAOB) to oversee the auditors of public companies. The PCAOB is overseen by the Securities and Exchange Commission (SEC) and consists of five full-time members. The main job of the PCAOB is to “oversee and investigate the audits and auditors of public companies”. Two of the five members must be or must have been CPAs, while the other three members must not be or cannot have been CPAs.
Accounting firms who audit public companies are required to register with the PCAOB and pay registration and annual fees (facultyfiles, 2002). In addition to the creation of the PCAOB to oversee the auditors, SOX mandated a set of internal procedures designed to ensure accuracy in disclosure of the finances of public companies. SOX placed more responsibility for the accuracy of financial reports on the top executives. According to Section 302 of the Sarbanes Oxley Act, CEOs and CFOs were required to personally certify quarterly and annual financial statements (FindLaw, 2002).
Officers were required to accept responsibility for reported figures in addition to having timely deadlines met. The Sarbanes Oxley Act also stressed stiff penalties for both noncompliances as well as for retaliation against whistleblowers. Section 802 specified fines up to as much as five million dollars and up to twenty years imprisonment, or both. Section 1107 mentions fines and up to ten years imprisonment for any harmful actions retaliated toward whistleblowers (FindLaw, 2002).
External auditors (only those registered with the Public Company Accounting Oversight Board) were required to review these financial statements and issue opinions on the accuracy of the financial reports and whether effective internal control was maintained in regards to financial reporting. The requirement of the external auditors reporting professional opinion regarding the internal control and the accuracy of the financial reports added considerable cost to all companies, as this verification is time consuming and requires a huge amount of effort.
Many arguments have come up regarding whether the cost is justified in the results. “SEC appropriations for 2003 were increased to $776,000,000. $98 million of the funds were to be used to hire an additional 200 employees to provide enhanced oversight of auditors and audit services required by the Federal securities laws” (facultyfiles, 2002). During the financial crisis in November of 2008, Newt Gingrich asked Congress to repeal Sarbanes Oxley. Congressman Ron Paul was one to argue that SOX was an unnecessary and costly government intrusion, placing American corporations at a competitive disadvantage with foreign firms.
Even though SOX found opposition by some, more were eager to see the positive results prevail. “Smart companies recognize that Sarbanes-Oxley presents an opportunity to improve management and increase efficiency”, according to the Trivoli Group (2004). The goal in enacting SOX was to place accountability for the reported figures and reduce the inaccuracy of financial reports to stockholders, thereby minimizing the unnecessary risks associated with public companies. References
How the Sarbanes-Oxley Act of 2002 Impacts the Accounting Profession. Retrieved May 14, 2009. Website: www. facultyfiles. deanza. edu/gems/kwakchris/Sarbanes Summary. doc The Sarbanes Oxley Act 2002 (2002). FindLaw H. R. 3763. Retrieved May 11, 2009 from FindLaw. Website: http://fl1. findlaw. com/news. findlaw. com/hdocs/docs/gwbush/ sarbanesoxley072302. pdf Tivoli Group (2004). Addressing the Key Implications of Sarbanes-Oxley. Retrieved May 12, 2009 from The Business Forum. Website: http://www. bizforum. org/whitepapers/ ibm. htm