The Sarbanes-Oxley act was a game changer. After the big scandals
with companies like Enron and WorldCom, it was clear that
something needed to change, and this act accomplished just that.
While there are many important parts to the Sarbanes-Oxley act,
sections 302, 401, 404, 409, and 809 are considered to be of
particular importance.
Section 302 states that financial reports/documents must certify
certain things. Such things include that the documents have been
reviewed by the signing persons and passed through the company's
internal controls within the last 90 days, documents must be free of
any untruthful statements/misleading language/omissions, the
documents must truthfully depict the financial wellbeing of the
company, and that the documents must have or be accompanied by a
list of any/all deficiencies/changes in internal controls as well as any
information of fraudulent activity including employees.
(corporatefinanceinstitute, 2020)
Section 401 states that financial statements absolutely have to be
accurate. They should also depict any/all off-balance liabilities,
obligations, and/or transactions. (corporatefinanceinstitute, 2020)
Section 404 states that companies have to publish a detailed
statement within their annual report which describes the structure of
their internal controls used. Such information has to be made
available with regard to the procedures followed for financial
reporting. This statement also should contain an assessment of how
effective these internal controls/reporting procedures have shown to
be. This section also states that an accounting firm that audits these
statements must also do an assessment of the internal
controls/reporting procedures as a part of their auditing process.
(corporatefinanceinstitute, 2020)
Section 409 states that Companies have to disclose, in no unclear
terms, any big/drastic changes in their financial position/operations
as quickly as can be managed. These changes include, but are not
limited to, any acquisitions, divestments, or important personnel
departure. (corporatefinanceinstitute, 2020)
And finally, section 802 states that company official that is found
guilty of concealing, changing, or destroying documents (with the
intent of preventing/disrupting an investigation) could face jail time
of up to 20 years along with fines. Also, any accountant that chooses
to help a company/company official in any of those acts could face
jail time of up to 10 years. (corporatefinanceinstitute, 2020)
Shortly after being passed, the Sarbanes-Oxley act received a lot of
complaints. Many people said that it was too harsh for smaller
businesses, others said that it was an overstep of the government.
Section 404, the internal controls report, requires a company to
supply their internal controls as well as how effecttive they think they
are. Auditors then also have to review their internal controls and
repot their finding on their effectiveness. This can be a tedious and
annoying task for the company as well as the auditors, especially in
the beginning when no one was used to it.
Chose to read the article,
MIT Sloan study shows negative effects of
Sarbanes Oxley on nonpublic entities
, written by the MIT Sloan
Office of Media Relations in 2017. This article discusses the negative
impacts that the Sarbanes-Oxley act had on the field. The author says
that, "After SOX, the demand for auditors by public companies
increased, leaving fewer auditors available for private companies and
nonprofits" (MIT Sloan Office of Media Relations, para 1.). Things
such as section 404, discussed above, caused auditing to become a
less popular field. This resulted in less auditors, making them more
expensive. Since there were less to go around, they cost more for
their services. One reason that this happened to the auditing field is
because the new regulations increased the complexity in the rules.
This increased complexity meant that auditors had to start
specializing in just one market, where they used to be able to operate
in multiple markets. The author seems to believe that while the
Sarbanes-Oxley act was necessary and has done good, it also has
negatively impacted the field.
References:
CFI Team (2020)
Sarbanes Oxley Act
. corporatefinanceinstitute.com
Sarbanes-Oxley Act: A Brief Overview - Corporate Finance Institute
MIT Sloan Office of Media Relations (2017)
MIT Sloan study shows
negative effects of Sarbanes Oxley on nonpublic entities
.
