SOX the Sarbanes-Oxley Act (SOX) Research Paper

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The auditing process was also significantly affected by the passage of Sarbanes-Oxley. Indeed, the most significant impacts of the legislation are faced by auditors. Auditors are forbidden to have conflicts of interest, such as consulting agreements with the firms they serve as auditors. This has increased the independence of the audit function. Auditors are now held directly responsible for the statements. This has shaped some changes in the auditing profession, in that auditing firms now no longer have other relationships with the firms they audit, and the trend in revenues for auditing firms is towards in increase in auditing revenues and a decrease in consulting revenues.

SOX also addressed the issue of board oversight. With the increased attention on financial reporting, most boards now have at least one member with strong financial experience to help analyze the financial statements. This again places increased pressure on those preparing the financial statements. All told, SOX has increased the scrutiny afforded the corporate financial reporting process. These changes, however, have increased investor confidence in financial statements, which in turn has had positive impacts on the stability of capital markets, as fewer scandals emerge.

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Another interesting implication of SOX has been a reduction in financial re-statements, where firms announce a set of earnings based on rough estimates, only to revise those statements at a later date. Restatements were epidemic prior to SOX and in many cases appeared to be oriented towards misleading investors. The negative consequences for such errors that have come about as a result of SOX has encouraged companies over the past few years to "get it right the first time."

In the long run, firms are making changes to adapt to the new processes that SOX encourages. Computerized accounting systems have been developed and implemented that deliver a consistent method of recording transactions. Real time systems for recording inventories and receivables have been implemented to reduce the risk of having those categories manipulated. By automating processes and making them more consistent, SOX has encourage best practices in firms, simply by increasing the risks associated with not following best practices. Firms have listened, and corporate financial reporting has become a more formalized, reliable process as a result, albeit a more expensive and time-consuming process as well.

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