The Sarbanes-Oxley Act was introduced in 2002 by Paul Sarbanes, a Senator, and Michael Oxley, a representative. In fact, the act’s name derives from the two men’s surnames (Kimmel, Weygandt & Kieso, 2012). It brought about enough information and proposed resources that can help ensure effective auditing and administration in corporations (Kimmel et al., 2012). The Act has eleven titles, and six of them are very significant in relation to compliance. They are 302, 401, 404, 409, 802, and 906. The U.S. Congress passed this act for the purpose of protecting shareholders and other citizens from accounting mistakes and fraud in business (Kimmel et al., 2012). At the same time, the Act was meant to improve the correctness of business disclosures.
The act functions in the financial and IT environments since it was a response to the prevalent scandals among U.S. companies in these two areas. It was, therefore, meant to help the companies avoid more scandals by improving corporate management and accountability. The government requires every company in the U.S. to comply with the law. The Act addresses issues in both the financial sector and the IT department but does not state the manner in which enterprises should keep their records. On the contrary, it proposes the type of records and the period they should be kept.
The United States Securities and Exchange Commission (SEC) is in charge of the administration of the act (Kimmel et al., 2012). This commission has the responsibility to come up with deadlines for compliance. It also issues conditions on the requirements. Some sections of the act are more relevant to compliance as compared to others. This paper discusses the most significant sections of the Act for the purpose of dealing with fraud in companies.
The Act also addresses corporate responsibility for financial reports. According to the act, regular statutory financial reports should include assurances that signing officers went through the report and that the report does not have any element of dishonesty or omission (Sarbanes-Oxley Act 2002, 2014). They should also assure people that the financial reports and all pertinent information describe the real financial environment (Sarbanes-Oxley Act 2002, 2014). The act further requires signing officers to be responsible for internal controls (Sarbanes-Oxley Act 2002, 2014). Precisely, they should evaluate them within a period of ninety days and make reports of their findings. In addition, the reports should include a list of all the weaknesses that exist in the internal controls and details of any employee-related fraud in the handling of internal activities (Sarbanes-Oxley Act 2002, 2014). Lastly, they should contain the changes that occur in internal controls or other close factors that could negatively impact internal controls (Sarbanes-Oxley Act 2002, 2014).
Therefore, this section helps reduce fraud by advocating scrutiny of financial statements. It also ensures that people in the accounting department take responsibility for the reports. Hence, incidents of fraud can easily be traced to individuals responsible for them.
The act also deals with the disclosure in periodic reports. It requires issuers to publish accurate financial statements (Sarbanes-Oxley Act 2002, 2014). Their presentations should not be characterized by inaccurate statements or admit to state material facts. The commission was supposed to establish whether current principals of accounting and other standards foster transparent and concrete reporting (Sarbanes-Oxley Act 2002, 2014). Therefore, the Act deals with fraud by ensuring accuracy in reporting. Once the reports are accurate, it is easier to detect cases of fraud in the operations of the accountants.
One section of the act relates to the Management Assessment of Internal Controls. The Act requires issuers to “include in their yearly reports information that relates to the scope and relevance of the structures of internal controls and the steps followed in financial reporting” (Sarbanes-Oxley Act 2002, 2014, par. 1). The Act also requires genuine accounting companies to include testimonies and reports on the evaluation of the efficiency of the structures of the internal controls and financial reporting procedures in their reports (Sarbanes-Oxley Act 2002, 2014). The inclusion of steps, testimonies, and reports on the evaluation of efficiency helps notice fraud.
The Act is also concerned with real-time disclosure. This information appears in Title IV of the Sarbanes-Oxley Act. It requires issuers to reveal to the citizens the details of all material changes in their financial situations and undertakings within a short period (Sarbanes-Oxley Act 2002, 2014). The revelations are supposed to be in a form that is easy to comprehend (Lander, 2002). The format should also be backed by trend and numeric data, especially by applicable graphic presentations. Thus, accountants have no time to hide their fraud. Furthermore, the easy format of the declarations ensures that even laypersons can understand the contents.
The act also requires companies to give fines and penalties on deceitful accounting officers. Precisely, it proposes a maximum of a 20-year jail term for individuals that alter, destroy, hide, mutilate, or falsify documents, records, or other concrete items for the purpose of tampering with or influencing investigations (Sarbanes-Oxley Act 2002, 2014). At the same time, this section proposes fines and jail terms of up to ten years for accountants that intentionally contravene the requirement of keeping all review and audit documents for at least five years (Lander, 2002). Therefore, individuals with fraudulent intentions will not execute them for fear of being punished for them.
The Effectiveness of SOX on Future Frauds
The Sarbanes-Oxley Act also addresses problems that occur and those likely to occur in the IT department (Lander, 2002). It requires IT departments to develop and keep archives of corporate records in a manner that meets the conditions set by legislation without involving many costs (Kimmel et al., 2012). This part makes SOX a very important aspect in the prevention of future crimes. Technology has taken over virtually all sectors in the running of companies and organizations. As a result, most of the crimes committed are related to technology. Therefore, SOX effectively prevents the occurrence of future crimes by setting rules that guide the use of technology in companies. The archives of records kept make it possible and easier to track and prevent the occurrence of fraud. Furthermore, it will reduce fraud by ensuring accountability, proper management, and making the auditing process easier.
The Sarbanes-Oxley Act 2002 curbs fraud in accounting departments by ensuring that individuals take responsibility for their actions and that all the records are straight. It also gives penalties and punishments to individuals that are found guilty of fraud. Therefore, the public is aware of all the activities that go on in the accounting department at all times. The act also prevents the occurrence of fraud in the future by ensuring the proper use of technology.
Kimmel, P. D., Weygandt, J. J. & Kieso, D. E. (2012). Accounting, tools for business decision-making (4th Ed.). Hoboken, N. J.: John Wiley & Sons, Inc.
Lander, G. (2002). The Sarbanes‐Oxley Act of 2002. Journal of Investment Compliance, 3(1), 44-53. Web.
Sarbanes-Oxley Act 2002 (2014). Web.