Sarbanes-Oxley Act of 2002

Over the past decade or so, records of accounting fraud has surface, especially in the case of Enron.  Enron at one point in recent years was one of the world’s biggest electric and natural gas traders as well as owned a hefty share of the market.  But, in October 17, 2001 the SEC or Security and Exchange Commission, had sent a document to the Enron Corporation, requesting further information about the fact that the company reported a huge loss in their third quarter, over hundreds of millions of dollars.  After word got out about the SEC inquiry, Enron’s stock fell 20%.  The next month the SEC inquiry went up a notch and became a formal investigation, where there was a subpoena for all financial records relating to Enron.  In response, Enron files false revised financial reports to the SEC, reporting the loss of $586 million dollars in losses for the previous five years.  Later on in early November, the company reveals that they embellished its earnings since 1997 by almost $600 million dollars.  (Collaborated by the Staff of the Washington Post, 2004)  Shortly after that’ the company began to deteriorate and led to top members of staff, financial auditors and accountants, imprisonment as well as a safe guard of sort promulgated by the SEC and established the PCAOB (Public Company Accounting Oversight Board), the Sarbanes-Oxley Act of 2002.

The names Sarbanes and Oxley represent the two men who for the most part put together the act, Senator Paul Sarbanes of Maryland and Representative of Ohio Michael Oxley. (What is Sarbanes-Oxley? 2007)  Due to the recently surfaced financial fraud, as mentioned above, the act demands that public companies enforce a special plan of action to maintain internal controls over their financial reporting. (Tracy, 2008, p. 64 & 65)  The Sarbanes-Oxley act of 2002 is formulated into eleven titles.

Within the eleven titles are in depth explanations, definitions and consequences for not complying with the act.  This act holds anyone dealing with a company’s accounting and financial statement responsible, especially company executives; who so ever knowingly falsify financial documentation will be held accountable to the full extent of the law.

Section 404 of the SOX (Sarbanes-Oxley) act, named “Management assessment of internal controls, puts into affect that public companies need to come up with a plan of action to keep accurate financial documentation. (Sarbanes & Oxley, 2002)  For a small company this means that where they would normally do the books themselves, they will now have to hire an external auditor to calculate the company’s costs and revenue as well as other financial statements.  Not only is this mandatory for a public business, but also due to the fear of title VIII section 802, Criminal penalties for altering documents, this section goes into the consequences of submitting false documentation as well as the business owners or executives will be held accountable for such acts.  (Sarbanes & Oxley)  In response of the cost for complying with the SOX act, many small public businesses considered made their companies private and have. In 2005 the Government Accounting Office conducted a survey of small businesses, 81% of the participating companies reported spending anywhere from $3000 to $1.4 million on external auditing services.  (Senate, 2006)  In addition, companies may have to layoff enough employees to maintain company operations cost as well as try to get employee amount to below the required amount to meet SOX requirements.  (Bergen, 2005)  In effect, small businesses are paying more money towards keeping the company legal than to increase productivity.

In conclusion, due to criminal actions committed by executives, such as those involved in the Enron Scandal, the SEC and Government Officials found it necessary to take precautionary measures by passing the Sarbanes-Oxley act of 2002.  This in return also mandates company owners and executives to comply with expensive burdens, such as contracting external auditors to capture, record, configure, analyze, and report financial statements.  In addition, this act is causing small companies to take actions such as un-listing their company, increase layoffs and ultimately spend more on keeping their company legit rather than on company’s productivity.  While passing the act was with good intentions, it might have also been one of the major causes of our present struggling economy.  The Sarbanes-Oxley act of 2002 is definitely a step towards the right direction as far as avoiding historical accounting mishaps, as well as the victim affected by them, but some adjustments need to be made as far as small businesses are concerned.  Either by increasing the required amount of employees that the Sarbanes-Oxley act covers or by instating a government program, where small businesses can apply for a government funded external auditor.

 References

1.      Bergen, L. (2005, June).  The Sarbanes-Oxley Act of 2002 and its effects on American business.  Retrieved April 13, 2009, from Financial Services Forum Web site: http://www.financialforum.umb.edu/documents/Sarbanes-Oxley.pdf

2.      Collaborated Staff of The Washington Post.  (Thursday, September 30, 2004).  Timeline of Enron’s Collapse.  Retrieved April 11, 2009, from Washington Post Web site: http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10.html

3.      Sarbanes, P., & Oxley, M. (2002, January 23).  One Hundred Seventh Congress of the United States of America: Sarbanes-Oxley Act.  Retrieved April 13, 2009, from News.findlaw.com Web site: http://news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf

4.      Senate, U.S. (2006, April). GAO, Report to the Committee on Small Business, and Entrepreneurship,(GAO Report). Retrieved from http://www.gao.gov/new.items/d06361.pdf

5.      Tracy, J. A. (2008).  Chapter 3: Bookkeeping and Accounting Systems.  In J. Friedman, S. Kennedy, & Michael Newman PhD (Eds.), Accounting for Dummies (4th ed., p. 64 & 65).  Hoboken, NJ: Inc.-Wiley Publishing.

6.      What is Sarbanes-Oxley?  (2007). Retrieved April 10, 2009, from Sarbanes-oxley.cc Web site: http://www.sarbanes-oxley.cc/