The Sarbanes Oxley act establishment was in 2002 by the United States Congress; fraud practices carried out by corporations facilitated its development. The act was needed to protect the public from erroneous practices. Michael, a representative, initiated the bill, and Paul Sarbanes, a senator, responded to scandals experienced by Typo, WorldCom, and Enron. The legislation aimed to safeguard shareholders by increasing the rate of transparency in accounting to prove the validity and dependability of the corporate. The bill establishes responsibilities for officers of the public trading corporation and the board and sets penalties for those who failed to comply with the regulations. The SOX implementation was not just but a legal approach but also a good practice for the business. It limits an organization from internal financial systems and persuades it to act ethically to maintain its brand. In addition, the implementation of SOX enhances the protection of company data from cyber-attack or insider threats.
SOX employs all organizations that are public in the states and foreign businesses that carry out trades. There are four essential laws in the Sox, which involve; the first rule states that the CFC and CEO are responsible for submitting all the financial reports and controlling the internal structure. They are accountable for the accuracy and presentation of financial documents. They will be held accountable if they are failures in the organization in matters related to finances, whether they are involved or not, and they risk jail time or monetary penalties. The second law outlines that the management in an organization is held responsible for the internal control structure of the financial records. Whereby if errors are encountered, there supposed to be reported to the chain as fast as possible this is to increase unambiguously in a company.
The third law applies that the SOX requires data security communication, statistics, and logical data. An organization is to evolve and execute a strategy that secures and protects the stored financial details and is utilized in regular company operations. The fourth law states that an organization must provide and maintain documentation to prove that they measure and continuously monitor SOX objectives (Geertsema et al., 2018). The SOX expects an organization to complete a yearly audit which they are to present to the stakeholders. The companies are to hire independent auditors to conduct the audits to separate from other audits to avoid conflicts of interest. An organization’s financial statements need to be verified to assess how genuine it is.
Assumptions in accounting are the organization of a business and it is operating. In addition, this assumption provides structure to the recording of business transactions. Accounting principles are the building blocks for basic accounting; the principles include; monetary unit assumption, economic entity assumption, specific time assumption, cost principle, revenue recognition principle, and conservatism principle. The major drawback of the SOX is the financial cost of implementing its provision. SOX impacts principles and assumptions in accounting in that many materials weaknesses are not disclosed until after a company has restated its financial statements. Thus, it becomes difficult for a company to estimate losses until later, which is ineffective. The organization needs to realize its gaps so that it can identify ways to resolve them. In addition, it does not allow a company to carry out assumptions and predictions as it deals with the actual data.
When Congress approved the 2002 Act of Sarbanes Oxley, it aimed to improve the reliability of financial reporting, restore investors, and combat fraud. However, some organizations will not be ready to comply, which is understandable, for they felt why they were supposed to submit with those who had been dishonest and negligent. Smaller companies specifically were a complaint about the cost of running and monopolization of executives. Perhaps the most burdening act of the Sox was section 404, which elaborates that the managers were responsible for the financial report. The audit is to assess management and information on the entire financial account of a company. The administration was to be held accountable if errors were detected in the presentation of the report. It is rather too much wanting from the managerial position as they are held responsible for error there not in participatory. SOX has helped improve business ethics by criminal penalties for those found altering documents, retailing against informants, and whistleblowers. Due to this, it has improved business conduction as it has reduced frauds in an organization.
SOX has improved its assets by providing frameworks that an organization uses to be better financial stewards in Financials records. In addition, the finances are easily predictable, which makes the stakeholders happy (Gunz & Thorne, 2018). It has increased the rate at which companies access capital markets due to proven financial reporting. Organizations are safer from the expensive embarrassing aftermath of data breaches and cyber-attacks. It is known that the Dara breach is relatively costly to clean, which ends up ruining the brand of an organization that may never recover. SOX is efficient in providing communication as it encourages teamwork between the managers and the audits. The summary is effective in explaining what SOX is and its impact on an organization.
Geertsema, P., Lont, D., & Lu, H. (2018). The impact of SOX on earnings management activities around CEO Turnovers. SSRN Electronic Journal. Web.
Gunz, S., & Thorne, L. (2018). Thematic symposium: Accounting ethics and regulation: SOX 15 years later. Journal of Business Ethics, 158(2), 293-296. Web.