Changes to Sarbanes Oxley Act
Twelve years ago, finance embezzlement at numerous companies destroyed the picture of USA capital market. This caused financial problems to investors, pensioners, financial market, and communities. As a result, some firms went out of market leading to destruction of the confidence people had in financial institutions, and government had to device policies to contain the situation. The Congress therefore brought up and passed the Sarbanes Oxley Act (SOX). Sarbanes Oxley Act implementation aimed to improve the quality of audit and enhance reliability of financial reporting.
However, SOX have deficiencies. Hasty passing of the Act caused them when government pressure on congress to act (Earnest & Young, 2010). In addition, the Act passed following previous failure in audit due to insufficiency of pre-existing rules. Nonetheless, accumulating extra rules does not guarantee financial security (Achilles Hill of Fraud Prevention, 2005). Therefore, the following study focuses on the changing section 404, 308, and 202 of Sarbanes Oxley Act as a way of improving asserting SOX effect in the financial market.
Firstly, changes should occur in section 201 of Sarbanes Oxley Act regarding compliance standards of the auditor. Several auditors activities expose the firm to financial embezzlement. For instance, allowing auditors to review, manage, consults and compile the companys financial status exposes the company to financial transgression and scandals (American Institute of Certified Public Accountants, 2013). Additionally, the councils standards fail to give incentives to these guardians of the financial market (Achilles Hill of Fraud Prevention, 2005). Elsewhere, the incentives given through the Act are not enough to encourage these whistle blowers to speak out in case they detect transgression by fraudulent managers (Wiley, 2007). This gives a chance to the corrupt managers to bribe them (Livingstone, 2003). As a result, it gives adequate incentives to audit team avoid their collusion with managers manipulating the records.
Secondly, amendments should occur in section 404 of Sarbanes Oxley Act concerning rules governing managers and their operations. The section 404 does little to minimize powers bestowed on a manager who is highly involved in financial transgression. It also denies more authority to forces that can counter high powers (Livingstone, 2003). For example, the act could have empowered investors. Furthermore, section 404 does not protect the auditors against losing their job if they resist pressure from managers wanting them to sign corrupted document. Protected audit team could place hurdles in managers financial embezzlement lane. However, it allows the managers to fire auditor and the corrupt managers will fire the auditor putting a lot of resistance when he is manipulating finances of the firm (Wiley, 2007). Instead, Congress should have set some policies that would lead to stockholders having power on dismissal of the auditor or give SEC authority to follow fired auditor for investigation with denial of manager the authority to fire auditors.
Lastly, section 308 of Sarbanes Oxley Act needs some modification too. According to the rule, it advocates compensation to shareholders and other investors after they lose their money through managers embezzlement. However, it fails to force managers involved compensate retirement benefits to the workers who lose their income (Livingstone, 2003). The rule should be changed to allow workers compensation.
In conclusion, implementation of legislatures does not necessarily guarantee success in controlling finance embezzlement. For instance, whether section 404 recommends upgrading internal factors of the company or not, beating an internal system is easy especially through management overrides or employees collaborations (Achilles Hill of Fraud Prevention, 2005). However, like recommended in section 201, fight against corruption can be achieved only through good remuneration and job security to the workers but not rules (Achilles Hill of Fraud Prevention, 2005).
Why CFO and CEO Pays Attention to SOX
The passage of the SOX act in the USA was a reform action that made it mandatory to companies registering with security exchange market to observe SOX regulations (InvestingAnswers, 2013). As a result, SOX brought revolution in altitude, culture, and procedures applied in the company’s management and lawyers. However, the legislation cannot guarantee accuracy in financial statement of public companies (Achilles Hill of Fraud Prevention, 2005). Hence, the following research explains why CFO and CEO pays attention to SOX rules despite being ineffective in observation of financial statement accuracy.
Firstly, SOX is a compulsory to use catalyst to the management of the company. It increases the standards in financial management through improving corporate governance, audit work and securities analysis (Maleske, 2012). It also ensures company officers and directors are attentive and responsible to economic conditions of the corporation they administer (InvestingAnswers, 2013).
Secondly, CFO and CEO want higher remunerations from the company since Sox led to increased transparency in companies governance as a method of improving investors confidence (InvestingAnswers, 2013). However, the worth of information disclosed by the firm affects the contractual agreement between the firm and the management. The more managers discloses their important management information, the higher the remunerations. As a result, CEO and CFO will be keen to receive compensation (Hermalin & Weisbach, 2007).
Thirdly, CFO and CEO are attentive when indirectly participating in audit committee, which has higher activities in the board of directors since it monitors, regulate, appoint, and control how the audit team works (InvestingAnswers, 2013). Moreover, through the audit committee in management team, CFO and CEO roles increases to hiring and dispelling an auditor, receiving reports made by auditors, and addressing issues regarding finances within the organization (Achilles Hill of Fraud Prevention, 2005). Additionally, there have occurred changes from the self-governance that used to exist in auditing into independent oversight of audit by Public Company Accounting Oversight Board (Achilles Hill of Fraud Prevention, 2005). Consequently, the CFO and CEO ensure the audit committee is available and working as it is requirement in SOX Act.
Lastly, law requires the CEO and CFO to submit a written certificate of financial situation of the company for future comparison and the officers and directors are careful not to face heavy penalties on giving misleading information about the financial statement and on pressurizing audit member to sign manipulated financial information (InvestingAnswers, 2013; Achilles Hill of Fraud Prevention, 2005). They also avoid cases making the company to resubmit its financial statement, which would required them to accompany documents of the bonuses, profits and compensation that were acquired after making personal trade with the name of the company the year the manipulated document was cancelled (Achilles Hill of Fraud Prevention, 2005). Hence, the CEO and CFO ensure they are keen in financial activities to avoid charges for fund embezzlement.
In conclusion, SOX has led to CFO and CEO concentrating on covering their backs than success of the firm. It has forced the free thinking element of managers out and the manager are acting like robots to satisfy the rules but not fulfill the companys obligations. Moreover, SOX has led to costly activities in the firm without improving its performance. This has slowed company expansion due reducing profit margins. It has also affected management negatively.
Achilles Hill of Fraud Prevention, (2005). Management Override of Internal Controls. Ney York: American Institute of Certified Public Accounts.
American Institute of Certified Public Accountants (2013). AIPCA Code of Professional Conduct. Web.
Earnest & Young (2010). The Sarbanes Oxley Act at 10: Enhancing the Reliability of Financial Reporting and Audit Capacity. Web.
Hermalin, B. E., & Weisbach, M. S. (2007). Transparency and Corporate Governance. Web.
InvestingAnswers, (2013). Sarbanes Oxley Act. Web.
Livingstone, L. (2003). Financial Statement: Fact or Fiction? USA: Les Livingstone
Maleske, M. (2012). Eight Ways SOX Change Corporate Governance. Web.
Wiley, J. (2007). Sarbanes-Oxley. Web.