Sarbanes Oxley Act of 2002 Research Paper

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Sarbanes-Oxley

Over the last 13 years, the issue of fraud in publically traded corporations has been increasingly brought to the forefront. This is in response to firms engaging in behavior that is unethical and borderline illegal. The result is that investors demanded drastic action to prevent the situation from becoming worse. In response, Congress enacted the Sarbanes-Oxley Act (i.e. SOX). This required firms to make added disclosures and it closed various loopholes corporations were taking advantage of. To fully understand the impact this is having on the regulatory environment requires focusing on the requirements imposes by SOX. Together, these elements will illustrate how it is designed to prevent fraud within publically traded corporations.

The Provisions of Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002, is dealing with the relationship corporate officers have with the board of directors. In the past, this relationship was used as a way for high level executives to receive special benefits. The most notable include: loans from the company, flexibility in preparing financial statements and a close relationship with the independent auditors / analysts. These elements make it easier for them to have direct control over the company's assets for personal use. (Green, 2004)

For example, Enron is second largest corporate bankruptcy in U.S. history. What helped to perpetuate it was the fact that the CEO (i.e. Jeff Skilling) had a close relationship with the board of directors. This allowed him to have greater amounts of power and influence in setting the direction of the company. His strategy was to take advantage of deregulation that was occurring within numerous public utilities around the globe. This involved participating in the production, distribution, trading and operations of them of different commodities (i.e. natural gas, electricity and water). The problem is that many of the projects were not economically viable. This made them very risky, given the fact that a number of events must go as planned in order to be profitable. Otherwise, there is a possibility of them experiencing tremendous losses.

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This happened with a number of projects that Enron was directly involved with. In response, Skilling had staff members create off the books limited partnerships. This is when the losses were transferred to these entities. Those investors who were involved them, received a higher amount of company stock to offset the losses. In 2001, everything began to unfold with Enron's earnings falling and the price of the stock heading lower. This made it difficult to hide the losses, despite claims to the contrary about future earnings projections by Skilling. Once this happened, is when investors began to panic about the quality of information they were receiving from Enron and other publically traded corporations. (Fox, 2003)

To restore confidence, the Sarbanes-Oxley Act was passed. It addressed a number of problems that contributed directly to Enron and other accounting scandals. The most notable include: the establishment of a Public Accounting Oversight Board, auditor independence, corporate responsibility, added financial disclosures, possible conflicts of interests and improved accountability. These elements were designed to prevent a repeat of Enron and other accounting scandals. This is accomplished by going after those practices which are not specially addressed through existing regulations. (Green, 2004)

The Public Accounting Oversight Board improved oversight by requiring auditors to register, it defined specific procedures for conducting audits, implemented quality controls and it is enforcing the various provisions of SOX on firms. This prevents auditors from having to close of relationship with executives at the company. Auditor independence is when accounting firms are prohibited from serving as the auditor and other roles (such as: consultants). This requires firms showing how they are maintaining objectivity throughout the process. (Green, 2004)

Corporate responsibility is when senior executives are held personally liable for the statements they make and their relationship with those committees involving the board of directors. This requires the CEO and CFO, certifying under oath that the information they are providing is factually accurate. If they do not,….....

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