Background And Basis Of The Sarbanes And Oxley Act

Sarbanes-Oxley Act
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Sarbanes-Oxley Act
Introduction
The US Congress enacted Sarbanes-Oxley Act in 2002 to protect the interests of investors and American workers from dishonest actions that involved accounting errors made by companies and improve the precision of financial reports from public companies. The law was passed to tackle the rampant public scandals that involved WorldCom, Enron Corporation, Tyco International PLC, and other public companies. Shareholders’ confidence was lost due to incorrect financial records and an increase in demand for regulatory standards. In this paper, it is thus crucial to explore the law, its background, its various sections, and its pros and cons. The main objective of the legislation was rebuilding investor confidence by making public companies to be reliable, transparent, and precise in their financial records so that investors can make the best financial decisions.
Background and Basis of the Sarbanes and Oxley Act
The Sarbanes-Oxley Act (SOX) is a federal law used in the United States to set standards for all boards in various companies, especially companies that have been listed as publicly-traded companies in the US. The legislation was enacted for re-establishing shareholder trust in commercial financial records. According to Coates and John (2007), before the SOX came into law, investors were used to making significant losses due to corporate failures, which were mainly caused by financial impropriety. SOX was deemed as the best way forward, and used to prescribe the authority of the board of directors in all public companies, and included penalties for particular defied misconduct. In addition, SOX required the Securities and Exchange Commission (SEC) to point out the conditions, which will be used to determine how public companies should comply with the law (Kecskés, 2017). The coming of the law into power was considered as a course of action determined on addressing the problems of accounting fraud primarily by attempting to accentuate the accuracy and reliability of company disclosures. The legislation is also essential since it increases the accountability of the individual members of the board of directors and company executives occupying high positions relative to the pre-SOX requirements.
Compliance with the SOX is crucial since it establishes on the following primary objectives such as regular conduct inspections by the SEC, enhancing transparency, and making the whole company accountable. In addition, the law seeks to make external auditors accountable, which resulted in further revision of the law and the establishment of the Public Company Accounting Oversight Board (PCAOB). The basis or the main objective for the enactment of the legislation, was to re-establish shareholders’ trust and the dependability of financial reports and others, albeit vital, non-financial statistics revealed by public companies (Kecskés, 2017). After the law was passed, chief financial officers (CFOs), chief executive officers (CEOs), and autonomous external auditors contracted by various public groups to include some relevant particulars, which were previously overlooked, in the corporati...