It's been interesting to learn more about the Sarbanes-Oxley Act of
2002 (SOX). Passed shortly after large corporations were in the
spotlight of highly publicized financial scandals, including fraud, at the
start of the 2000s, the SOX Act of 2002 implemented and mandated
reforms surrounding the existing regulations for financial reporting
produced by corporations of all sizes while also implementing a more
strict set of disciplinary actions for those who break the law. Looking
specifically at section 404 of the SOX Act of 2002, the major
requirement here is that companies include the breakdown of their
internal controls, how they are implemented by management, an
assessment of whether or not the controls seem to be effective, and
finally the report from an external auditor that confirms the accuracy
of what is being presented in those reports. (SOX 101)
It is section 404 that often is the source of complaints and criticism.
As the article from soxlaw.com mentions, it is important for
companies to share all crucial information with shareholders at all
times to avoid what happened to Enron investors who had no idea
that the records they were reading involved questionable reporting
practices that made the company's bottom line look better than it was
by intentionally hiding their losses and re-working their accounting
strategies to make it seem as if their losses were less than what they
were. It is also clear that internal controls need to be established,
upheld, and that repercussions should be in place for instances when
these controls are ignored, not met, or pushed to the side. However,
one of the most common complaints is that for smaller companies,
this is hard to follow. Oftentimes, hiring outside auditors can be
costly and those fees can add up very quickly especially if they have
to pay more, for example, if there was an instance where they need
more time with auditors than originally planned. There is also the fact
that this law provides absolutely no consideration for the size of a
corporation and demands the same levels of reporting even though
some companies have less access to the resources that could help to
produce the quality of work that the law expects. This is especially an
issue because one company cannot be used in an auditing and
consulting capacity, which was allowed before the law was passed.
The costs associated with presenting reports in accordance with the
law can be costly and are one of the biggest critiques the law has
faced since its passing.
References
Kenton, W. (2022, May 8).
Sarbanes-Oxley (SOX) Act of 2002
.
Investopedia. Retrieved July 28, 2022, from
https://www.investopedia.com/terms/s/sarbanesoxleyact.asp
The Pros and cons of the Sarbanes-Oxley Act
. SoxLaw. (2021, May
12). Retrieved July 28, 2022, from https://www.soxlaw.com/the-
pros-and-cons-of-the-sarbanes-oxley-act/
Sarbanes Oxley 101. (2022, July 28).
SOX Section 404: Management
Assessment of Internal Controls
. Sarbanes Oxley 101. Retrieved July
28, 2022, from https://www.sarbanes-oxley-101.com/SOX-404.htm
