Accounting Assignment #1

Corporate Governance: Sarbanes-Oxley Act of 2002

John Andre Gnanaranjan

Davenport University

ACCT 640

September 9, 2014

Corporate Governance: Sarbanes-Oxley Act of 2002

A topic related to this week’s reading that has significant impact on the accounting profession is the issue of corporate governance; specifically the Sarbanes-Oxley Act of 2002 (SOX). This important legislation enacted by Congress in 2002 seeks to deter the incidence of accounting fraud. According to Gelinas, Dull & Wheeler (2012), the Sponsors of this landmark legislation were Paul Sarbanes and Michael Oxley. The Act represents a huge transformation of federal securities law. Its implementation resulted from the corporate financial scandals that involved Enron, Global Crossing and WorldCom (Elliott & Elliott, 2009).

There are various aspects enshrined in the SOX legislation. Noreen, Brewer & Garrison (2010) acknowledge that these aspects seek to improve the accuracy and reliability of financial reporting and disclosure. The Act demands both the chief financial officer (CFO) and chief executive officer (CEO) to certify in writing that the financial statements as well as other disclosures pertaining to company operations fairly reflect the results of the operations in the company. If they certify false results, the CEO and CFO might be eligible for prolonged jail terms. Apart from increasing penalties for corporate wrongdoings, the act also protects the independence and objectivity of securities analysts, increases Securities and Exchanges Commission resources, strengthens the independence of companies that audit public corporations and establishes severe penalties for destroying or altering documents that investigators may use in official proceedings.

In addition, as envisaged by Elliott & Elliott (2009), SOX also established the Public Company Accounting Oversight Board, which has the responsibility of enforcing professional standards and ethics for the accounting profession. The Act affects public companies in the United States as well as international companies with a presence in the US. The legislation also encourages corporate fraud disclosure by protecting whistleblowers that raise the alarm on any malpractices going on in the company (Noreen et al., 2010). Since its implementation in 2002, SOX has realized some significant success and has helped to increase financial reporting in publicly traded companies.

Nevertheless, despite the legislation’s potential in curbing accounting malpractice, many senior executives particularly the CFOs have often argued that the legislation places too much burden on their daily routines. For example, Elliott & Elliott (2009) point out that many executives have reported that SOX makes their work less satisfying and significantly increases their workload because of the numerous documents that they have to certify. Even though the opponents voice their criticism, this legislation is important for increasing the transparency in financial reporting and hence improving the credibility of the accounting profession (Gelinas et al., 2012). This is because it can serve as a major deterrent against any top executives with the intention of engaging in corporate fraud.

References

Elliott, B., & Elliott, J. (2009). Financial Accounting and Reporting (13 ed.). FT: Prentice Hall.

Gelinas, U. J., Dull, R., & Wheeler, P. R. (2012). Accounting information systems (9 ed.). Mason, OH: South-Western/Cengage Learning.

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2010). Managerial Accounting for Managers (2 ed.). New York, NY: McGraw-Hill/Irwin.