View of Management and Accountants on the SOX Act

View of Management and Accountants on the SOX Act

Following the collapse of biggest US companies such as Enron and Worldcom, the US Congress passed the Sarbanes-Oxley (SOX) Act in 2002. The objective of the SOX Act was to protect investors from fraudulent accounting practice by corporations. SOX encourage accurate financial reporting and strengthen the internal control. The Act makes the management to be transparent and accountable to investors by disclosing accurate financial information. The Act requires the public companies to filing reports and be audited by an independent external auditor.

Internal control refers to the procedures and control instituted by management to safeguard assets, minimize the occurrence of errors and frauds and accurate financial reporting. The internal control techniques include segregation of duties, rotation, arithmetical, accounting controls and physical controls (Ackermann, 2017).  Effective internal control may be a challenge and expensive to put in place.

Section 302 of the Act requires the management to certify the financial statements, indicating that they are have been accurately prepared.  Besides, Section 409 requires managers to disclose significant accounting matters if they happen to occur in between reporting period such as quarterly or annually. Management is also required to disclose off-balance sheet items that may arise. Section 404 of the Act require management to establish effective internal control procedures and report on whether or not they are sufficient. The management may be required to restate financial statement if they willfully prepared misleading financial statements. If management restates financial statements, they are liable for a jail term, penalties or loss of profits or bonuses. Besides, the management may be convicted and barred from holding a public office. Furthermore, the management has to disclose any available pro forma statements and whether they have been prepared in compliance with GAAP  (Woo, 2011).

The public corporations are required to independent external auditors. The auditors are required to report on the truthfulness of the financial statements.  The liabilities of auditors increased after passing the SOX Act. Failure of auditors to report wrong financial statements can be liable for a jail term, fines or penalties. For example, the auditors for Enron scandal were found guilty and the audit firm was dissolved. The auditors have to report on the strength of internal control.

Corporations are required to adhere to the rules of the SOX Act of 2002. The small and large public corporations are required to meet the same standards and regulations of the SOX Act. Apart from hiring independent auditors, there have huge audit fees. The work for the auditors is complicated in adherence to the SOX Act; therefore, they charge high audit fees. Small corporations find it challenging and expensive to meet the requirements of the SOX Act.

The SOX Act also developed the Public Company Accounting Oversight Board; it established standards to be met, public accountants. The board requires auditor partner for a public company to be rotated after every five years and reduced the conflict of interest between the audit firm and the firm.

The strong internal control protected the interest of investors. Since the management are required to have an effective control system, the chances of investors their investment is minimal. Also, management discloses important financial matters; investors are fully aware of the operations of the company. The investor does expect, the management to safeguard their interests and transparent in financial reporting.

References

Nwogugu, M. C. I. (2011). Un-Constitutionality of the PCAOB and Sarbanes Oxley Act (SOX); and the Failure of SOX. SSRN Electronic Journal. doi: 10.2139/ssrn.1761731

Ackermann, C. (2017). A Mixed Methodology To View Internal Audits Internal Control Functioning. Corporate Ownership and Control, 14(2). doi: 10.22495/cocv14i2c2p4

Woo, C. H. N. (2011). United States Securities Regulation and Foreign Private Issuers: Lessons from the Sarbanes-Oxley Act. American Business Law Journal, 48(1), 119–176. doi: 10.1111/j.1744-1714.2010.01113.x