The Sarbanes-Oxley act came about in response to the huge
bankruptcies of Enron and WorldCom and the fraud that was
discovered. i The purpose of the act was to help prevent fraud among
publicly traded companies and protect investors from being given false
information regarding companies they were looking to invest in. The
act requires the company to assess the effectiveness of its own internal
controls and report on it. i In addition it requires the CEO and CFO to
sign off on and certify the financial statements of the company. If fraud
is found, they can face criminal penalties. The act requires the auditing
firms to implement quality control when working with publicly traded
companies and that each audit has to have a lead auditor and a second
partner to review the first's work. i The act also requires that the
auditors (individuals) do not work with the same companies for more
than five years. Other employees from the auditing firm can, but they
do not want there to become a relationship that could lead to fraud so
they require the change up. The auditing firm is also required to audit
the clients internal controls as well and issue a report on their
effectiveness. They are also prohibited from providing many other non
audit type services to their audit clients. In the past, audit firms were
self regulated, but the SOX act created the PCAOB (Public Company
Accounting Oversight Board) that is responsible for standard setting
and enforcement. Any audit company preparing audits for publicly
traded companies must register with them. i
I found an article from Going Concern that looked at the effectiveness
of the act in preventing fraud. They feel that SOX along with Section
404 (which is the part that requires auditing ones own internal controls
as well as the auditing company doing so) has helped prevent fraud at
many levels. They say numbers for restatements are way down
especially material ones. Everyone is more careful and double checks
for mistakes prior to submitting their financials. i The extra oversight
makes is much more difficult for anyone to commit fraud period. i In
addition, section 806 was added which is protection for
whistleblowers. People have come forward in the past, like prior to
Enron and WorldCom, but no one listened to them. These individuals
were also threatened by their employers for reporting fraudulent
behavior. Systems are in place to help protect the whistleblowers and
encourage them to come forward and has even gone as far a offering
rewards to these people based on the amount of fraud that is found. i
Some of these rewards have been hefty in amount from $300,000 to $1
million. i The act may not be stopping all the fraud, but it has lead to
more ethical behavior and companies wanting to be known for their
ethics. The audit firms can also be held criminally responsible, so the
chance of someone covering your fraud up is pretty small. i They aren't
going to take the chance of criminal repercussions to help others
commit crimes. It has created more work for CPA's and has also raised
the cost of doing business as well. Unfortunately, people can't be left to
regulate themselves, as we have seen they may start out honest but the
pressures of business and success can make it easy to slip off the
straight and narrow and then become entwined with fraudulent
behavior i Many digging holes they can never get out of.
Zuckerman, J. & Stock, M. (July 26, 2022). i Going Concern. i Sarbanes-
Oxley 15 Years Later: Accountants Need to Speak Up Now More Than
Ever. https://goingconcern.com/sarbanes-oxley-accounts-
whistleblowers/
