There were a great number of businesses and corporations, before the creation of the Sarbanes-Oxley Act (SOX), which were conducting illegal and fraudulent practices in order to show that their organization was making a huge profit. A lot of the internal control procedures that was discussed in our textbook either didnâ€™t exist or, if existed, were never enforced within these businesses. There were many factors that caused a lot of the scandals, such as Enron and WorldCom, to be brought to light. In response to these illegal practices and the fallout from Enron and WorldComâ€™s faulty financial statements, members of Congress were pressured by investors, who were left with nothing, to draft up legislation to regulate procedures and prevent a catastrophe like the Enron scandal from happening again. Hence, Senator Paul Sarbanes and Representative Michael Oxley drafted and sponsored the creation and passage of the Sarbanes-Oxley Act of 2002 [ (Sarbanes-Oxley Act) ]. ...view middle of the document...
The SOX required internal controls for assuring the accuracy of financial reports and disclosures. It also mandated audits and reports on these controls. The government really wanted to ensure nothing was left hidden from the reporting process.
The relation of the SOX and internal controls is also seen in the procedure of assigning responsibilities to senior executives. The SOX set how these executives are to interact with external auditors. It made each executive totally responsible for ensuring that the financial are accurate and valid. If these reports are not in compliance, then the executive have to get them in compliance or be subject to fines, penalties, and even prison.
Since the enforcement of the Sarbanes-Oxley Act (SOX), many other controls were set in place to make sure that executives are keeping watch on what is going on in their organizations. It will be bad to have the companyâ€™s financial reports to be labeled fraudulent. If this happens, the by virtue of the SOX, the executive(s) could find themselves in prison. With this in mind, executives in the past and current have struggled with ways to ensure funds are not lost or stolen, and that accountants, treasurers, and petty cash custodians are reliable, trained, and competent enough to handle the responsibility that they are assigned and understand that at no times will they share the role of two positions such as the treasurer and the controller.
The Sarbanes-Oxley Act was greatly needed to reinforce internal controls. These controls stop theft, fraud, and money laundering. Establishment of the SOX solved auditor conflicts of interest, boardroom failures, securities analystsâ€™ conflicts of interest, and helped banks to be able to make better decisions about lending to companies based on accurate financial statements rather than falsified ones. The SOX continues today in ensuring companies are enforcing standards of internal control to produce valid and accurate financial reports.
Sarbanes-Oxley Act. (n.d.). Retrieved December 18, 2009, from Webster's New World Finance and Investment Dictionary: http://www.yourdictionary.com/finance/sarbanes-oxley-act
Sarbanes-Oxley Act. (2002, August). Retrieved December 2009, from Wikipedia,The Free Encyclopedia: http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act