Sarbanes Oxley Act Analysis
Following the loss of millions of investor dollars in the wake of Enron's entry into bankruptcy, the Public Company Accounting Reform and Investor Protection Act was signed into law in 2002. In order to foster investor confidence and help prevent future occurences, the act, also known as Sarbanes-Oxley, was passed to increase corporate accountability and transparency in their financial reporting and internal financial controls.
Other People Are Reading
-
Function
-
To improve corporate financial honesty, the act creates standards for financial reporting and the authorship of those reports. Subchapters III and IV of the act, titled, respectively, Corporate Responsibility and Enhanced Financial Disclosures, deal with the new requirements of both the contents of reports and the endorsement by financial officers of those contents.
Corporate Responsiblity
-
Subchapter III outlines the new responsibilities of financial officers regarding financial reports. Primary financial officers, or those acting in that function, must certify that they have reviewed the report, that it does not contain any untrue statements and that it "fairly present(s) in all material respects the financial condition and results of operations of" the company.
-
Enhanced Financial Disclosures
-
Subchapter IV details the additional reporting requirements in regards to internal controls. Companies must issue annual reports on the state of their internal controls. The report must state management's responsibility for establishing internal controls and financial reporting processes and contain an assessment at the end of the financial year of "the effectiveness of the internal control structure and procedures" in regards to financial reporting.
Features
-
Another feature of the act is the requirement that audits be performed by outside companies. These auditing companies may no longer provide multiple services to their clients: they are now limited to acting solely in an auditing capacity. Additionally, financial officers may no longer accept loans from their own companies and disclosure of compensation for executives is mandatory.
Consequences
-
The act also provides consequences for failure to comply. The act states, "A violation by any person of this Act...shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934." Financial officers who certify inaccurate financial reports may be subject to imprisonment of up to ten years and fined up to $1 million. If the certification of inaccurate information is done willfully, the jail time can be increased to 20 years and the fine up to $5 million.
-
References
- Photo Credit business report image by Christopher Hall from Fotolia.com
