Financial record and auditing manipulation or fraud have been one of the most rampant strategies deployed by organizations and individuals to embezzle funds since the 19th century as there wasn’t a law like the Sarbanes-Oxley Act.
The US government dived into finding the best ways to curb the practice after lots of money was laundered in the country many years ago.
In their quest to curb the ever-increasing money-laundering and highly destructive events, the American lawmakers proposed the Sarbanes-Oxley Act which they believed would be an effective way to end the practice.
The Sarbanes-Oxley Act was eventually enacted in 2002 after lots of deliberations, discussions, and sittings with the executive arms of government.
So, what’s the law all about? Is it effective? Does it have any side effects on the economy? Should a country with high money-laundering records adopt the same strategy?
In this report, we will answer all these questions above. Hence, we advise you to pay rapt attention as we hit the ground running. .
Sarbanes-Oxley Act Of 2002: Meaning, History, And Features
What Is Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is a law enacted by United States lawmakers to end the incessant money laundering in the country.
Also known as SOX, it is a federal law that ensures topnotch financial regulations for public companies, stakeholders, employees to protect them against fraudulent practices.
Enacted on July 30, 2002, the Sarbanes-Oxley Act spells out the punishment for anyone caught trying to embezzle government or organization’s funds by altering financial records and statements.
It was equally enacted to regain investors’ trust and confidence in the US capital markets because business owners weren’t interested in doing business in the country after watching Enron and WorldCom go bankrupt.
History Of the Sarbanes-Oxley Act
We can’t discuss the history of the Sarbanes-Oxley Act without mentioning the unprecedented fall of Enron and WorldCom companies due to accounting scandals in the 21st century.
Enron was the country’s largest energy firm as it features diverse state-of-the-art technologies and high annual revenue. Unfortunately, it filed for bankruptcy On November 30, 2001 — a case that spelled doom for the company.
WorldCom, on the other hand, was a US telecommunications giant with millions of subscribers nationwide. It couldn’t survive the damages caused by the fraud, including over $3.8 billion loss.
Both US companies were arguably the world’s leading companies before the unfortunate incidents. Therefore, their bankruptcy was a shocking and disappointing one that sent negative signals to every public and private company globally.
It greatly affected the US market as many investors couldn’t help but question the security level American business sector.
The George Bush-led government proposed and signed the Sarbanes-Oxley into law in 2002 to prevent such events from happening in the future.
Sarbanes-oxley Act Functions And Provisions
The government’s main reason for creating the Sarbanes-Oxley Act is “To protect investors by improving the accuracy and reliability of corporate disclosures made under the securities laws, and for other purposes.”
The law primarily focuses on creating new and durable protection for business companies, providing better accounting regulations, ensuring severe punishments for culprits, and promoting corporate responsibility.
Sarbanes-oxley Act of 2002 Requirements
The SOX Act features provisions and requirements that allow it to achieve its priority and mission.
It contains 11 sections (Titles) and subsections guiding all US public companies, public accounting firms, and some non-US companies operating in the country. The first section involves the Public Company Accounting Oversight Board’s creation.
The non-profit corporation will oversee the audits of public companies, ensuring they comply with the newly set auditing standards.
Section Eight addresses Corporate and Criminal Fraud Accountability by stating the penalties for altering documents or securities fraud.
The SOX Act contains some existing rules and regulations enforced by the Securities and Exchange Commission (SEC), such as the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940.
The law also makes provisions for small business enterprises, private companies, and non-profit organizations.
Meanwhile, section 302 and Section 404 of the Sarbanes-Oxley Act of 2002 deserve a special mention as they contain important information you should know as CEO, employees, legal students
The 302 section extensively discusses the “Corporate Responsibility for Financial Reports.” It orders CEOs and CFOs to take their time to review all financial reports to be sure they are “fairly presented” without conflicting information that could incriminate them.
The section also confirms that CEOs and CFOs are solely responsible for internal accounting controls, meaning they would face the government’s wrath in case of any fraudulent and manipulative acts.
Lastly, this section commands all CFOs to submit their end-of-the-year financial reports alongside the Internal Controls Report.
Section 404, on the other hand, deals with “Management Assessment of Internal Controls” It charges companies to publish their internal accounting controls details for more transparency.
It equally commands corporate executives to personally certify the accuracy of the financial statements provided by their companies because they will be punished individually if the SEC finds any violation.
The Sarbanes-Oxley Act of 2002 equally discloses maximum protection for anyone who calls the government’s attention to any companies engaged in fraudulent activities via “The Whistleblower Protection Act”
This section of the law states that employees or contractors who report fraud or testify fraud to the Department of Labor are completely safe from dismissal, discrimination, or any form of retaliation.
Is The Sarbanes-Oxley Act of 2002 Effective?
According to Brickey’s (2003) study, the Sarbanes-Oxley Act has drastically increased the punishment for corporate fraud, while the maximum terms and fines for securities fraud have doubled since the Act’s enactment.
It also suggested that mail and wire fraud punishment has increased by four-folds. Considering the aggravated penalties, many fraudsters aren’t bold enough to engage in the evil practice.
In the same vein, the jaw-dropping $20 reward and maximum protection for Whistleblowers have expectedly increased the rate at which the public is eager to uncover any suspicious company or firm.
According to PricewaterhouseCoopers 2007 Global Economic Survey, there is a tremendous increase in companies reporting fraud in 2007 compared to 2003 stats.
Though there is a slight increase in the percentage of overall occupational fraud occurrences after SOX enactment, data analysis revealed a significant decline in the amount of median dollar loss.
Some factions of business owners confessed that the Act played a significant role in improving their financial management prowess. They claimed it sharpened their standardizing processes, documentation, and ability to create stronger board oversight.
Studies also showed that many investors feel more relaxed and assured doing business with US firms, thanks to the law.
Considering the stats above, it’s safe to admit that the Sarbanes-Oxley Act of 2002 has reduced the fraud related to financial statements manipulations to some extent. However, we must disclose that the law has been unable to eradicate fraud.
Judging from what have been said concerning the SOX law, it is expensive to implement. Citicorp disclosed that Section 404, which suggests improved internal control, can be financially challenging.
According to Gray & Ehoff in 2015, high-profile frauds cases were discovered in 2012 (10 years after the implementation of Sarbanes-Oxley).
Groupon, Bank of America, Adobe all experienced fraud during the year in review. Walmart, Target, Bitcoin, and the Small Business Administration all uncovered fraud cases in 2013.
Hence, it is obvious that the SOX law isn’t durable or strong enough to prevent cyber-related frauds, which keep growing at an alarming rate.
The only solution is if the law has provisions for well-trained forensic accountants and auditors who will identify and prevent internet-based illegal financial alterations and manipulations.
That’s it for the well-discussed Sarbanes-Oxley Act! What do you think of the law- Is effective? Share your opinions with us via the comment section below. Thanks for staying tuned.