Sarbanes-Oxley Act was enacted in 2002 after some major companies
were caught up in financial fraud and accounting scandals were
exposed in some of the largest companies in the United States. This act
was to reduce these scandals from happening ever again and created
more compliances among corporations and the auditing firms so that
there was more accuracy and transparency among financial reports, so
that investors could have more trusts in the numbers.
Sarbanes-Oxley requires the CEO and CFO to sign off on all financial
statements for the companies and they are subject to criminal
penalties. Companies also need to assess and issue a report on the
effectiveness of their internal control policies. Internal controls are the
processes and procedures put in place by a company to prevent fraud
or accounting scandals within the company.
SOX not only made changes for companies but for the audit industry.
Auditors need to have a second partner to review and approve the audit
reports for any public company that they work on. The primary and
secondary auditors also need to rotate out every five years from
auditing a company, so that they do not become to close and friendly
with the employees of the company they are auditing. The audit firm
also needs to review and assess the effectiveness of the company’s
internal control policies and they too must provide a report on the
company’s policies and procedures. Section 404, the internal controls
policies of the company is the most widely complained about
compliance, because of the increase in cost of having the auditor
review, assess and report on the company’s internal control polices.
Another major change with SOX is that Audit firms cannot provide
multiple services to an audit client, such as advisory services for
improving the efficiencies of corporate operations. This policy reduces
any conflict of interest that the two parties may have, especially if the
advisory services are paying a lot more than the audit services. Finally,
SOX created the Public Company Accounting Oversight Board
(PCAOB) to govern the Auditing firms that have public companies for
clients. The PCAOB makes sure the audit firms register if they have a
public client and monitor them as well as audit any of their reports. The
PCAOB also creates the standards for the audit industry, and they
handle enforcement of compliances.
The topic I chose was the impact that the Sarbanes-Oxley Act has had
on small companies. The biggest impact that it has caused on smaller
companies is the increased in audit and compliance fees. Smaller
companies typically do not have the right number of employees to
instill effective internal controls. For small companies the “complex
standards can pose a problem for all firms, but small firms are affected
more because they tend to lack inhouse staff to respond to the new
environment” (Kamar, E., Karaca-Mandic, P., & Talley, E, 2007).
Another issued that SOX has caused smaller companies is the
imbalance of audit firms that will work with smaller companies, because
they won’t make as much of a profit like the would when working with
the larger ones. This imbalance is tough to fix, because of the regulatory
process to enter this industry is slow. Bottomline is that the Sarbanes-
Oxley Act has really hit smaller companies harder, because they don’t
have all the resources necessary to efficiently comply with Section 404,
let alone deal with the imbalance of not enough audit firms.
Sarbanes-Oxley Act has been a great improvement on the reliability
and accuracy of financial reports that companies provide, and I believe
many good things have come out of it. However, we have some
improvements that need to be made to even the playing field for the
smaller companies.
Reference
Kamar, E., Karaca-Mandic, P., & Talley, E. (2007). Sarbanes-Oxley’s
Effects on Small Firms: What Is the Evidence? In S. M. Gates & K. J.
Leuschner (Eds.),
In the Name of Entrepreneurship?: The Logic and
Effects of Special Regulatory Treatment for Small Business
(1st ed., pp.
143–168). RAND Corporation.
http://www.jstor.org/stable/10.7249/mg663emkf.12
YouTube. (2017).
The Sarbanes Oxley Act of 2002
.
YouTube
. Retrieved
July 28, 2022, from https://www.youtube.com/watch?v=eeQagPytR-
o.
