1. The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping auditing and financial regulations for public companies.
Lawmakers created the legislation to help protect shareholders, employees, and the public from accounting errors and fraudulent financial practices. Auditors, accountants, and corporate officers became accountable for the new set of rules. These rules were amendments and additions to several laws enforced by the Securities and Exchange Commission (SEC), including the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940. The SEC enforces the Sarbanes-Oxley Act. The main areas that the Act is focused on are:
The Act primarily sought to regulate financial reporting, internal audits and other business practices at publicly traded companies. However, some provisions apply to all enterprises, including private companies and nonprofit organizations. Additionally, the Act established penalties for non-compliance with its provisions. Compliance with the Act is about financial disclosure and corporate governance.
In exchange for these higher costs, which have already fallen substantially, Sarbanes-Oxley promises a variety of long-term benefits. Investors will face a lower risk of losses from fraud and theft and benefit from more reliable financial reporting, greater transparency, and accountability. Public companies will pay a lower cost of capital, and the economy will benefit because of a better allocation of resources and faster growth. Sarbanes-Oxley remains a work in progress–section 404, in particular, was implemented too aggressively–but reformers should push for continued improvements in its implementation, by PCAOB, rather than for repeal of the legislation itself.
References :
https://corporatefinanceinstitute.com/resources/kn…
https://corpgov.law.harvard.edu/2007/03/05/the-goa…
2. In the early 2000’s there was a surge of companies that seemed to be taking advantage of the little governance of financial statements. The big name that came to the top of the list was WorldCom… which was certainly not the only one. WorldCom filed for a $104 billion bankruptcy in 2002 after VP whistleblower Cynthia Cooper discovered approximately $4 billion fraudulent balance sheet entries. This scandal along with many others at this time impacted many stockholders and led to the development of the Sarbanes-Oxley Act. (Bates et al., 2014 & SoxLaw, 2021).
According to SoxLaw (2021), the Sarbanes-Oxley Act is a bill that was created by Senators Paul Sarbanes and Michael Oxley that passed to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant by the securities laws.” This created bill was passed and signed into law by President George Bush in 2002. The three main focuses of the Sarbanes-Oxley Act are (1) reducing agency costs in corporations, (2) restoring ethical conduct within the business sector, and (3) improving the integrity of the accounting reporting system within firms. (Bates et al., 2014).
These are the focuses of the Sarbanes-Oxley Act because it helps stockholders in a number of ways. This creates for more detail-oriented CEO and CFO attention to financial statements. “CEOs and CFOs are obligated under Sarbanes Oxley to assure that financial records are accurate, and that reports submitted to the SEC are accurate. They are penalized for non-compliance even if the non-compliance was accidental.” (SoxLaw, 2021). This act is a way to hold corporations accountable for fraudulent statements which helps to provide more transparency to stakeholders. With this transparency that is required it gives everyone involved a sense of security because in compliance with the Sarbanes-Oxley Act companies are required to provide a yearly audit that is made easily available to stakeholders. (SoxLaw, 2021).
References:
Bates, T. W., Parrino, Kidwell, D. S. (2014). Fundamentals of Corporate Finance (3rd Edition). Wiley Global Education US. Retrieved from https://online.vitalsource.com/books/9781118901656
SoxLaw. (2021). Sarbanes-Oxley Act Origins. Retrieved from www.soxlaw.com
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