Due to the financial debacles and the effects to stakeholders of large corporations like Enron and WorldCom, the U.S. Senate and House of Representative enacted the Sarbanes-Oxley Act in July 2002. The bill set the standards for ethical corporate governance for the external reporting of financial statements. This article looks at the first four titles of the bill enacted by congress and its effects on corporate business ethics.
Title I – Public Company Accounting Oversight Board
The first title of the Sarbanes-Oxley Act establishes a Public Company Accounting Oversight Board that oversees accounting firms that perform audits on public held corporations. Title I consists of nine sections that establishes regulations for proper accounting audit procedures.
Title II – Auditor Independence and the Sarbanes-Oxley Act
This part of the bill sets the standards and limitation for external auditors. It also addresses conflicts of interest between the auditors and corporation being audited. It also restricts the auditing firm from engaging in other business activities with the company they are auditing. There are a total of nine sections of Title II dealing with auditor independence.
Title III - Corporate Responsibility and the Sarbanes-Oxley Act
Title III of the Sarbanes-Oxley Act covers the fiduciary responsibility for certain principal officers of the corporation. For example the Chief Executive Officer and Chief Financial Officer must certify that they have reviewed the external financial reports like the corporations income statement. They must further certify that the report does not contain any falsities or untruthful statements.
This section of the bill also covers specific penalties for principal officer that falsify external financial documentations. Penalties could include the elimination of certain benefits as well as civil penalties. Penalties could include monetary fines as well as prison sentences for infractions of this title. The increased penalties are covered in title IX of the Sarbanes-Oxley Act.
Title IV - Enhanced Financial Disclosures of the Sarbanes-Oxley Act
Title IV has nine sections that describe enhanced financial disclosures for external financial reporting. Below are some of the highlights of Title IV.
- Section 401 - describes what’s to be included in corporate financial statements as well as rules of omission of financial data.
- Section 404 - covers management assessment of internal controls as well as the accounting firm's assessment of how effective the corporations control are in assessing their financial statements.
- Section 409 – requires the corporation to disclose any changes in their operations that have an effect on financial reporting.
In total there are eleven separate titles within the Sarbanes-Oxley Act. Each title of the act was designed to instill ethical corporate governance and boost investor confidence in U.S. public corporations. Hopefully with enactment of the Sarbanes-Oxley Act, the corporate scandals of the early 21st century will be a thing of the past.
Source:
sarbanes-oxley.com
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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