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Topic: SOX Type: Essay Subject: Accounting and Finance

Academic Level: Undergraduate Style: Chicago Language: English (U.S)

Number of Pages: 3 (double-spaced, Times New Roman, Font 12)

Number of sources: 4

Written by: https://writersperhour.com

Task Details

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How SOX changed the accounting industry when it was implemented. The background data that

lead to the SOX overhaul and has it accomplished what it was drafted to do?

INTRODUCTION - State your thesis and the purpose of your research paper clearly. What is the

chief reason you are writing the paper? Also, state how you plan to approach your topic. Is this a

factual report, a book review, a comparison, or an analysis of a problem? Explain briefly the

major points you plan to cover in your paper and why readers should be interested in your topic.

BODY - This is where you present your arguments to support your thesis statement. Remember

the Rule of Three: Find three supporting arguments for each position you take. Begin with a

strong argument, then use a stronger one and end with the most persuasive argument for your

final point.

CONCLUSION - Restate or reword your thesis. Summarize your arguments. Explain why you

have come to this particular conclusion.

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Introduction

The Sarbanes-Oxley (SOX) is an important set of regulations widely employed mostly by

the public sector’s board of management as well as public accounting organizations in the United

States. This paper looks at the SOX Act in details and explains how the act has played an 1

enormous role in the accounting industry to assess its effects to the accounting industry since it

was implemented.

With the recent outcome resulting from the changes made by the regulation in the

accounting industry, this paper will employ cases in point to emphasize on the regulation’s

implementation. This would extend to States and Countries within the United States for more

comparisons cases if any. As such, the focal point of this paper will be to compare and review the

Sarbanes-Oxley engagement in the accounting industry, whereby it will explain the significance

of this act’s existence, precisely, “the consequences that the American organizations have

identified after the implementation of this act.” 2

The main points of this discussion will involve the main changes exhibited from the date

of the SOX Act implementation, such as, the set of new standards drafted and the SOX impact on

the CPA profession as well as the Auditors of organizations, and the new responsibilities

transferred to the Public Companies Accounting Oversight Board (PCAOB). This will help

learners understand how the SOX Act can be used to solve problem situations in the accounting

industry.

Eilifsen, Aasmund, Messier, Jr William F., Steven M. Glover, and Douglas F. Prawitt. Auditing and 1

Assurance Services. New York: McGraw-Hill Education, 2013.

Prentice, Robert A. Guide to the Sarbanes-Oxley Act: What Business Needs to Know Now That it Is 2

Implemented. Michigan: Cengage South-Western, 2004.

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The Sarbanes-Oxley (SOX) Act

The SOX Act, signed in 2002, introduced some significant changes in the financial

practice guidelines and corporate governance. This extended to providing protection to the public

and shareholders from fraudulent practices and accounting errors in enterprises and improving

the corporate disclosure accuracy. The SOX act comprises of eleven (11) titles out of which, the

most pertinent sections to compliance to individuals’ needs to meet the act’s demands include;

Sec. 302, Sec. 401, Sec. 404, Sec. 409 and Sec. 802. 3

How SOX Act implementation has changed the accounting industry

The SOX Act extends its regulations to an organization’s disclosure control. An Internal

procedure design should provide correct financial disclosures, whereby SOX requires that

signatories to an established internal control claim such responsibilities. This is to ensure that

other members of the entity make the information about the company and consolidated

subsidiaries known to the officers through the organization’s periodic reports. Officers as part of

the requirement need to evaluate and present their conclusions in the reports about the efficiency

of their internal control over the basis of their evaluations. SOX also requires that an external

auditor comment on whether the management observes the internal control over the

organization's financial reporting maintenance. Thus, “this practice adds to a financial

statement’s opinion in regards to an entity’s report accuracy.” 4

Prentice, Robert A. Guide to the Sarbanes-Oxley Act: What Business Needs to Know Now That it Is 3

Implemented. Michigan: Cengage South-Western, 2004.

Ibid4

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SOX Act regulates the disclosure of items in the periodic reports. This regulation

stimulated by the Enron bankruptcy brought much attention in organizations by advising them to

consider their off-balance sheet particulars. Without considering such items, an organization or

individual may engage in fraudulent activities while taking advantage of the instruments. To this

extent, SOX act brought back into focus such instruments in association with the SEC’s studies

and reports in an effort to facilitate the understanding the degree to which these instruments can

be used as well as whether the accounting principles adequately address these instruments. 5

The implementation of the SOX Act has brought about alterations in the internal control

assessments. It requires that the management and external auditors account for adequacy of an

organization’s internal controls for financial reporting (ICFR). The section requires an

organization to involve; established and maintained internal records and assessed internal

controls when showing its effectiveness to the public. In general, SOX provides that

organizations adopt a framework for their internal controls as described by the Committee Of

Sponsoring Organizations (COSO) of the Tread-way Commission.

Another change experienced in the accounting industry is the inappropriate influence on

the accomplishments of audits. SOX provides rules for prohibition, enforcement, no preemption

of other laws and deadlines for rulemakings about audits perceived to have been conducted

inappropriately. The commission as per section 303 is to propose regulations that are required in 6

less than 90 days after the enactment of the act and 270 days for issuing the final rules after the

Prentice, Robert A. Guide to the Sarbanes-Oxley Act: What Business Needs to Know Now That it Is 5

Implemented. Michigan: Cengage South-Western, 2004.

Prentice, Robert A. 6

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enactment dates. The commission also has privatized authority to impose this section as well as

any rule issued pursuant to this article.

The background data that led to the overhaul of SOX

Large corporate fraudulent activities occurred between the years 2000 to 2002, owing to

the varied, complex factors that created conditions and cultures favoring such activities. Cases in

point are the highly publicized fraudulent operations at Enron and WorldCom, which exposed

essential problems associated with conflicting interests and practices to incentive compensation . 7

Some of the factors that promoted fraud during the period mentioned above included;

Inadequate financing of the SEC: The SEC’s annual budgets showed a steady increase to

nearly twice the results of the pre-SOX levels. This made it justifiable that the enforcement of

SOX act would be more effective for post-SOX dealings.

Boardroom failures: Audit committees hold the responsibility for the establishment of

omission mechanisms for financial reporting of the U.S companies on behalf of their investors.

The scandals came to establish that some board members had failed to meet their responsibilities,

also to not having adequate proficiency to understand complexities of business.

Banking practices: A firm borrowing loans and debts tend to signal investors about its

risks. A case in point is the Enron scandal, which issued loans to organizations while ignoring the

Ibid7

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risks involved. In the long run, the firm suffered from bad debts and massive payment

settlements it had to pay.

Internet bubble: The 2000 sharp decline in the stock market’s technology adversely

affected investors, whereby some mutual fund managers engaged in fraudulent activities of

convincing investors to purchase specific stock, before selling that particular stock without the

investor’s knowledge. This called for action, which was the implementation of the SOX Act.

Executive compensations: The pressure to handle earnings resulted from “misses” of

small earnings, stock options as well as bonus practices with the fact that companies tend to

ignore considering them as expenses accrued from compensations. Therefore, with a large bonus

based on stock, managers were experienced pressure to meet the stated targets.

From the above mentioned indicators,

Each one of them posed a problem that needed to be controlled, leading to SOX bill

being proposed by Senator Paul Sarbanes and the Representative Michael Oxley on July

30, 2002. In fact, the proposal came to be legal and has had an effect towards the

accounting industry over the years as seen in this paper.” 8

Many organizations have adopted this regulation in their operations and have exhibited

improvements in their internal controls. This proves how the SOX Act has achieved its drafted

accomplishments.

Koehn, Jo Lynne, and Stephen C. DelVecchio. "Revisiting the Ripple Effects of the Sarbanes-Oxley Act." 8

CPA Journal, 2006: 14-19

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Conclusion

In a nutshell, SOX has proved its significance in the accounting industry, whereby several

economies have improved since its implementation. This is because the SOX ensures the

provision of precise and accurate financial statements, disclosing all the required information

that both the public and investors deem vital for their decision-making processes. As seen in this

paper, SOX encourages transparency of the organization's financial performance through

prohibiting fraud and illegal activities that mutual fund managers are likely to engage in.

Therefore, the act’s adoption is of a positive influence to owning and operating a healthy

business entity.

Bibliography

Eilifsen, Aasmund, Messier, Jr William F., Steven M. Glover, and Douglas F. Prawitt. Auditing

and Assurance Services. New York: McGraw-Hill Education, 2013.

Koehn, Jo Lynne, and Stephen C. DelVecchio. "Revisiting the Ripple Effects of the Sarbanes-

Oxley Act." CPA Journal, 2006: 14-19.

Prentice, Robert A. Guide to the Sarbanes-Oxley Act: What Business Needs to Know Now That it

Is Implemented. Michigan: Cengage South-Western, 2004.

Written by: https://writersperhour.com