A Primer on Sarbanes-Oxley
By Steven Williams
This paper identifies issues, activities and practices,in financial reporting by public companies that were sanctioned by the Sarbanes-Oxley legislation Act of 2002 (SOX). This act was passed with the intent to restore public confidence and increase transparency in financial reports of publicly held companies, due to the aftermath of the financial scandals that plagued companies such as Enron and Worldcom (Jennings, 2012). The problem to be investigated is the ethical issues that were legislated by SOX, the cost associated with the implementation of the new act on different ...view middle of the document...
The new legislation requires public accounting auditors to be independent from the operations of the company they are auditing. This requirement is not new as it is a basic requirement from all accounting firms to be independent of all activities of the corporation they are auditing. This concept of independence is the foundation of the profession of public accounting. It is based on the belief that auditors should be independent in facts and appearance in order to minimize outside pressure that may be imposed by clients who hired them. Lack of independence can impair their judgment on the accuracy of the financial statements being audited. This concept also inspires confidence in the quality of the financial statements audited by the public who have interest in them(Previts & Merino, 1998). It can be easily concluded that there is a potential conflict of interest if a work is performed and then audited by the same party. In this case, the stakeholders cannot be assured of the validity of the report. The legislation by PCAOB applicable to the auditor’s independence was not necessary if the public accounting firms and the companies involved had adhered to the auditors’ professional requirements.
The legislation with the issues of corporate responsibility, financial disclosures, and conflicts of interest in general could have been prevented if the leadership of the companies involved exercised their moral responsibility in their role as managers. Moral responsibilities include honesty, transparency, respect and fairness. It may also include factors such as excellence in the conduct of business, profitability and others.
Davis,Schoorman, &Donaldson (1997)define stewardship as a higher level of duty of governance in which the motivations of managers are based on pro-organizational rather than self-interest behavior (p.27). Ethical stewardship can be defined as a “morally established duty and a fiduciary obligation” (Caldwell, Hayes & Long, 2010, p.501). Honesty and ethical conduct include the handling of both personal and professional conflict of interest, the ability to fairly, accurately and timely report and discloseall the information that are the representation of the company one is entrusted in his or her fiduciary responsibilities. This means that thecertification and disclosure of financial statements by CEO and CFO should be their binding words as to their truthfulness of the financial condition of the company they are responsible for. Finally, an organization that wants to portray itself as trustworthy should not have boards of directors who have personal interest in its daily operation. The organization is better served if the directors are viewed as autonomous, and impartial to the one who make daily decisions. This will ensure that they have the ability to review the operation of the managers and make decisions that are independent and to the best interest of the organization.