The Sarbanes-Oxley Act of 2002, also known as SOX or Sarbox, was put into law by the United States federal government on July 30, 2002.
This act was created as a reaction to a plethora of corporate and accounting controversies, such as that associated with Enron, Tyco International and WorldCom. These controversies involved corporate frauds during the years 2000 to 2002 and these were related to the conflict between the interest rates and compensation measures used by these companies. These fraudulent corporate cases resulted in a total loss of approximately $500 billion which then significantly lowered the United States’ market value (Farrell, 2005). More importantly, these corporate controversies significantly decreased the public’s confidence in the traditional measures taken by companies with regards to accounting and reporting of assets and incomes. The Sarbox Act, identified as Pub. L. No.
107-204, 116 Stat. 745, was tagged as such, based on the Act’s sponsors, namely Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH). The Sarbanes-Oxley Act has been described as the most comprehensive reform in American business procedures since the administration of Franklin D. Roosevelt.The Sarbanes-Oxley Act covers a broad spectrum of business practices and describes an improved protocol that should be implemented in all United States public company boards and sects. It also identifies the responsibilities of the Corporate Board with regards with criminal acts and their associated penalties. The Act also states that the Securities and Exchange Commission (SEC) is responsible for executing rules so that all companies follow this Act (Hevesi, 2006).
It is believed that this Act is essential to the stability of the United States’ economy. However, there are also comments that the Act will result in more confusion with regards to standards in corporate practices, resulting in damage than correction or prevention of wrong business practices.The Sarbanes-Oxley Act also created a new agency, named as the Public Company Accounting Oversight Board (PCAOB), which is mandated to supervise, regulate, inspect and control all accounting firms. Essentially, the PCAOB plays a major role as the general auditor of public companies across the United States.
The Sarbox Act is also responsible for providing independence, governance, assessment and disclosure of corporate auditing processes among companies across the United States.The establishment of the Sarbox Act has facilitated the relocation of the business center of the world from New York’s Wall Street to London, where the Financial Services Authority is known to control the financial processes with a less rigorous method. Also, other companies from other countries around the world have benefited from the Sarbox Act because these companies now have better options to gain higher credit ratings within the United States (Neil, 2006). In addition, companies also get a better chance of obtaining better credit scores with the London Stock Exchange. Such changes are mainly due to the implementation that lower interest rates be used by companies across the United States (Schumer and Bloomberg, 2006).The Sarbox Act also indicates in its Section 404 that every company should be managed and auditor both by internal and external auditors so that future financial frauds will be avoided.
This provision may be costly because it will take routine documentation and testing, yet it saves a significant amount of money, in case another fraudulent case happens in the future.