The Sarbanes-Oxley Act (SOX) plays an essential role in the prevention of fraudulent financial
reporting by corporations. According to The Laws That Govern the Securities Industry (2013),
the Act “mandated a number of reforms to enhance corporate responsibility, enhance financial
disclosures and combat corporate and accounting fraud, and created the PCAOB, to oversee
the activities of the auditing profession.” The accounting profession essentially was regulated
internally which caused the large fraud cases like Enron. The SOX Act drew attention to auditor
performance and legal liabilities in a devastating environment of numerous accounting frauds.
I do not agree with the critics that do not believe the act will be effective at deterring
accounting frauds. I believe that the SOX Act enhanced the level of internal control and is
effective. Especially, for setting some guidelines and regulations that should be followed. The
act also aims to increase responsibility of top management as stated, “Some of the most
important provisions of the Sarbanes-Oxley Act are aimed at increasing the responsibility of
corporate officers and directors for the reliability of their company’s financial statements”
(Messier et. al. 2019, p.696). Of course, it is not an act that is shielded with full protection of
financial fraud. However, it can mitigate cases to the extent of Enron. These scenarios can be
lessened through the SOX Act – the SOX Act requires internal controls to be tested frequently.
If there are any fraud acts, the lack of internal controls would raise the flag before the issue
escalates.
On the other hand, I agree with the critic’s argument that the threat of imprisonment will have
little to no practical effect. As negative as this may sound, but people that are willing to
commit financial fraud to the extent of Enron are not afraid of a few years in prison. The
people that will even consider committing a financial fraud, are likely to have weighed the
risks as well. But overall, I believe that the SOX Act has enhanced control over financial
reporting by setting the base for regulations that should be followed.
References
The Laws That Govern the Securities Industry. (2013, Oct 1). Retrieved from SEC:
https://www.sec.gov/answers/about-lawsshtml.html#sox2002
Messier, W. Glover, S. Prawitt, D. (2019). Auditing & Assurance Services: A Systematic
Approach 11th Edition. McGraw Hill Education.
