Sarbanes-Oxley was introduced in 2002 as a result of corporate scandals which affected millions.
This provides security from future scandals. The law has “11 major provisions”(Linsely 2003). A “Public Accounting Board” was created in order to involve the Securities Exchange Commission in auditing. No longer are non auditing services able to be hired to perform company audits. This is to ensure that the responsibility of the audit remain within these companies. The lead auditor may not serve a term beyond five years.
Management may not monitor the auditing committee. These individuals are required to report to the auditing board. Newly, the members of the auditing board must not be affiliated or receive any other funds from the company for any other service in which they are auditing.
The auditing committee monitors the auditors instead of management. Most importantly, company CEO’s and CFO’s are being held accountable for their firms financial statements. They are required to state these financial records and explain them. Additionally, lack of compliance in reporting will cost these companies to pay back any money that they received from the statements that were inaccurately reported.
This leaves companies in a situation where they will be responsible for their own financial records. If not, they will lose capital. Officers cannot make trades of stock during a black out period. Any off balancing must be reported and explained. Additionally, management must provide a separate analysis and discuss the potential causes.
Lastly, the annual reporting process now includes analysis on how effective their internal controls are. These eleven provisions simplistically hold companies accountable for their financial actions. It requires them to have a broad knowledge of what is going on with their company financially. It also requires an explanation of their financial status. This law requires compliance by corporations. Best of all, the penalty will affect the directors and managers of these corporations directly, which is assurance of accuracy.
When companies will pay for their own deceptions, chances are they will make an effort to comply.