Sarbanes-Oxley stands for Senator Paul Sarbanes and Representative Michael Oxley. These are the people who made the draft of Sarbanes-Oxley act of 2002. They intended to protect the investors through improving reliability and accuracy of company disclosures. The laws were made in pursuant of security concerns and other reasons. It created new regulations for company accountability and penalties for defaulters (Labaton, 2002). It aimed at making changes on how companies and cooperative executive board members and executives should interact with one another including the company auditors. Additionally, it was meant to bring accountability of the stakeholders to take up their responsibilities during crisis to eliminate shifting blames from one person to another. It required that all cooperate managers get their specific responsibilities in relation to their duties. Accuracy of the reports was greatly stressed by the act. It derived new internal mechanisms and processes to improve the validity of financial records. The act prescribes financial reports should constitute internal control mechanism report. The act stated at the end of every year, where a company should indicate an assessment of how effective the internal mechanisms can preserve financial information. It has also an effect on the assessment procedures an organization has used Schroeder (Michael & Cassell, 2002). The corporate handles this section after it has done review of policies, procedures and policies during auditing.
Before the act
Before the Sarbanes-Oxley act came into action, many companies incurred various accounting setbacks that almost shook the whole world in 2001. The companies were able to manipulate and tweak the financial data. The managers made efforts to hide the information regarding the losses, liabilities and debts that the firms accrued. This is because the directors and managers had power to control their corporations report to lure more investors. They could protect their large sums of paychecks and fail to offer protection to investors. The investors lost most of their investments due to poor management of funds together with manipulation and hiding of realities of the company’s information. Retirement funds for workers went down to dust as other investors recorded losses from their investments. Audit companies were allowed to check other details including the bookkeeping processes (Kathleen, 2002).
After the Act
Many changes came into action. Fist, managers and directors of companies were given responsibilities to avoid shifting blames. All stakeholders became responsible for their actions in running the companies. Secondly, large outer organizations were allowed to monitor the performance of companies through proper monitoring of their performance records. They included majorly financial reports. The government managed to instill faith in the public to bring back their investments back into the companies. After implementation of the act, auditing firms were prohibited from engaging in certain businesses like bookkeeping.
The Impact of Sarbanes-Oxley Act
The act enabled creation of a body by the name, Public Company Accounting Oversight Board, PCAOB. It had the mandate to make supervision on auditors and audits through enforcing and steering adherence to the set laws. It has all the authority to make investigations and take disciplinary actions against any fraud company. It has another mandate to come up with new regulations meant to improve financial record monitoring, independence, quality control and ethics. All these were directed to satisfaction of public demands. Public corporations are supposed to come up with a committee that helps in auditing. The auditor has a responsibility of reporting to the audit committee to verify the audits he/she makes (Clark, 2006).
On the other side, CFOs and CEOs have greater tasks to communicate with audit committees. It is now compulsory that all officers of management must make clarification of all institutional finance records. The companies’ managers are kept on toes to ensure all their records are well kept since they are liable to stiff penalties for failing to properly maintain financial records. The stiff laws enacted by Sarbanes-Oxley made it easier to make follow up activities and find out financial crisis in case it occurs. The act imposed several rules on companies. It meant that the companies had to register and get more skilled work force to carry out the auditing process. This really increased the cost of service delivery leading to a massive outcry of auditors, managers and directors of different companies. It forced the government to postpone the program for one year to allow ample time to register (Clark, 2006). The upcoming companies were unable to raise the required amount. They almost got extinct.
Analysis of Sarbanes-Oxley on the auditing process
The Sarbanes-Oxley act helped to bring order in record and financial issues. Many investors had feared to invest in different companies due to fear of losing their investment. Most companies engage in this process to ensure that they keep their stakeholders updated on the progress of their investment companies (Clark, 2006). Each individual in this scheme has his or her role to play in the process. Managers in this case take the process by identifying, evaluating and documenting significant controls. They also have the responsibility to decide a particular business units and locations to undergo evaluation. Editors on the other side have a role to identify opinions on effectives control program. Identification of the program by editors and managers can be of great importance. For instance, assessment of internal features can enhance the process of identifying risks lending consistency in the whole process. Assessment can easily enhance controls throughout the company. It may also reveal controls that are duplicate or unnecessary together with those for improvement. Improved control process can lead to low fraud, litigation and good efficiencies.
Clark, K. (2006). “It’s Payback Time.” US News & World Report. Web.
Kathleen, D. (2002). “Agency Faults SEC on Handling of Audit Panel,” Washington, DC: Washington Press.
Labaton, S. (2002) “Chief of Big Pension Plan Is Choice for Accounting Board,” New York Times, p. 33
Michael, S. & Cassell, B. (2002). “GOP Objects to Biggs to Run Oversight Board,” Wall Street Journal 33(2), 12