The Act of Sarbanes Oxley

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act aims to protect investors by improving the reliability and accuracy of public disclosures made to persuade corporate clients (Gray & Ehoff Jr., 2015) . Accuracy is achieved by increasing public and corporate accountability for the information processed. This law is intended to increase public confidence in the financial information provided by companies. The introduction of the Sarbanes-Oxley Act incorporated an organization’s internal controls into the processing of financial reports. As a result, managers and accountants have different views. Again, the law has made many changes for companies, accounting firms, and investors. This paper will focus on these questions.

Views of managers and accountants on the law

The management feels that internal audit reports are necessary for the processing of internal controls (Schneider, 2009). External auditors are required to go through internal financial reports aiming at establishing any deficiencies in those reports. In addition, the management views their role as that of supervisors as the external auditors communicate to them the deficiencies of the reports given by the internal auditors. After receiving the external communications, the management interacts with the internal auditors to address the external auditor’s concerns.

The accountants view the Act as an empowering tool (Schneider, 2009). The external auditors are just expected to rely on the information provided by the internal accountants and ask questions if there are any. The external auditors are not permitted to indulge in the work of the internal accountants; they should just rely on them. Moreover, the work of the internal accountants serves as the principal evidence for the opinion of internal controls to the external auditors. Further, the act seemed to have increased the workforce for the accountants (Gray & Ehoff Jr., 2015). The external auditors are no longer responsible for maintaining record books for organizations since the accountants are fully responsible for them. Therefore, the internal accountants are tasked with bookkeeping, business valuation, and internal audits. The external auditors are only supposed to approve the work of the internal accountants.

Effects of the Sarbanes-Oxley Act on Corporations

The most evident impact of the Sarbanes-Oxley Act is strengthening audit committees in corporations (Kisow, 2011). The audit committee is tasked with handling the financial management decisions for the corporation. Furthermore, the audit committee is independent of the top management and free to make any decisions regarding the finances of the corporation.

The Act is costly for the corporations as they have to examine internal control tests which must be included in the annual audit report. Testing of the controls requires heavy personnel including IT technicians, which is cost inefficient for most companies. Additionally, the role of the top management has changed; they are tasked with accurate financial reporting. Individually, the top managers must approve the financial reports before announcing to the public.

Effects of the Sarbanes-Oxley Act on Accounting Firms

The act imposes heavy punishments on the accounting firms if they do not complete audits carefully. Moreover, accounting firms are penalized if they do not supervise companies’ internal controls. Further, accounting firms are required to register with the accounting oversight board. The registry ensures that the board approves and certifies any works of the accounting firms. The act has increased the operational cost for the accounting firms since they have to pay registration and annual fees to the oversight board. Moreover, the accounting firms have lost their independence; their activities are subject to the authority of the board (Kisow, 2011).

Effects of the Sarbanes-Oxley Act on Investors

The Sarbanes-Oxley Act is the strongest pillar investors lean on (Schneider, 2009). The Act requires corporations to report accurate financial information, which has boosted investors’ confidence. The act restored financial transparency in the market, which enables investors to make rewarding investment decisions. With the Act, corporations cannot give false financial reports, hence securing investors.

References

Gray, D., & Ehoff Jr.,C. (2015). Sarbanes-Oxley and Dodd-Frank: Then there was fraud. Journal of Business & Economics Research (Online), 13(1), 19-n/a. Retrieved from https://search.proquest.com/docview/1655539134?accountid=45049

Kisow, M. R. (2011). Impact of Sarbanes-Oxley and IRS form 990 on nonprofit organizations in Pennsylvania (Order No. 3483927). Available from ABI/INFORM Collection. (902623516). Retrieved from https://search.proquest.com/docview/902623516?accountid=45049

Schneider, A. (2009). The roles of internal audit in complying with the Sarbanes-Oxley Act. International Journal of Disclosure and Governance, 6(1), 69-79. doi:http://dx.doi.org/10.1057/jdg.2008.18