Sarbanes-Oxley Act (SOX) and its Impact on Corporate America
Sarbanes-Oxley Act (SOX) was adopted by Congress signed by President Bush in 2002. It was named after Senator Paul Sarbanes and Representative Michael Oxley who introduced it in their respective bodies. This public law was prepared to enhancing the corporate governance sector and restore its credibility with the investors. The SOX puts significant oversight and legal enforcement into the ethical practices of corporate America and substantially increases the independence of the auditors. It is one of the most important laws which consider the US business practice in the contemporary period. The law has a large volume, but provides clear and understandable policy in the area of audit. The act is providing regulations on numerous financial issues: it is codifying and expanding the auditor independence rules, regulations on corporate responsibility, fraud accountability and corporate tax returns.The authors describe SOX as an act “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes” (SOX, 116 STAT. 745).
The Title I of the Act have introduced the establishment of the Public Company Accounting Oversight Board (PCAOB), which was to oversee the audit of public companies. The Board was granted the right to set standards, conduct inspections and enforcement actions (SOX, 116 STAT. 755). The independence of auditor has become the topic of Title II. It has extended the range of prohibited activities for auditors and banned the consultations to the companies which were audited (SOX, 116 STAT. 771), stipulated the mandatory pre-approval of audit services by the audit committee (SOX, 116 STAT. 772) and their reports to the committees on the most critical policies used, auditor rotation each five years (SOX, 116 STAT. 773), and a cooling off one year period, before the auditor which worked for company could be employed in a key management position (SOX, 116 STAT. 774). The examination of the rotation of auditors was to be conducted by the US Comptroller General (SOX, 116 STAT. 775). Title III of SOX contains provisions on the corporate responsibility. It specifies that audit committees are responsible for appointment, oversight and compensation for the auditors’ work, and are able to establish the procedures for conducting complaints and solving conflicts (SOX, 116 STAT. 776). The corporate responsibility for financial reporting is stipulated more explicitly, and the improper influence on auditors is banned (SOX, 116 STAT. 778). The rest of the provisions are specifying on the prevention of conflict of interest, financial disclosures and accountability for the fraud among the auditors and corporations.
The need for the SOX adoption is often explained due to the notable fraud scandals which took place in the American corporate US, seriously undermining the confidence of investors. They were connected with large corporations Enron, WorldCom, and Tyco, and exposed the serious problems with frauds, manipulations and unethical behavior of the corporate structures and auditors. It has substantially undermined the confidence of investors and encouraged the corporate sector to promote changes, …