Sarbanes-Oxley Act, Also Known as the SOX,

Sarbanes-Oxley Act, also known as the SOX, was passed in the year 2002 in the United States of America to not only strengthen and fortify the Corporate Governance of the country but also to re-install confidence in the average investor. The SOX Act was known as the Sarbanes-Oxley Act because the U.S. Senator Paul Sarbanes and the U.S. Representative Michael Oxley sponsored it. The factors that led to the necessity of this act were that, primarily, there were a number of accounting as well as corporate scandals affecting the corporate structure of several famous and prominent companies of the U.S.A. As an inevitable result of these scandals, there was a loss of trust on the part of the people of America in the several different accounting and reporting practices in the corporate world of the United Sates of America. The Sarbanes-Oxley Act provides wider legislation facilities as well as sets new standards of working for all the numerous Public Company Boards of the U.S.A., all their management, and all Public Accounting Firms. (IT and Business Tutorials)

The SOX Law is comprised of 11 sections, each of which deals with subjects like Additional Corporate Board responsibilities, to Criminal penalties. The Security and Exchange Commission will be required to implement and carry out the rulings that must be made to comply with this new SOX Law. Not only does the Sarbanes-Oxley Act establish new standards for Corporate Boards and also for Auditing Committees, but it also creates and establishes certain new accountability standards for Corporate Management and also establishes the criminal penalties in case of management offences. External Auditors are also governed now under the new independence standards made up by the Sarbanes-Oxley Act. It has also served to establish a new Public Company Accounting Oversight Board, known as PCOAB, under the SEC or the Security and Exchange Commission so that the rulings under the new Law can be implemented to comply with the SOX Act. (IT and Business Tutorials)

There is a general consensus that the Sarbanes-Oxley Act is in fact more of a burden than a boon to financial investors and Corporations. Why is this so? One opinion is that the compliance with the Sarbanes-Oxley Act is extremely difficult and also cumbersome in many ways, in fact so unwieldy that the deadline for its implementation has in fact been delayed two times now by the Government of the United States. However, despite the aforesaid difficulty, it is true that several Companies are already under the compliance of the Act, even when they do not have a formal auditor sign-off. This maybe good, but it is the unavoidable burden of compliance to the Act that has put several Companies into a difficult position. (Sarbanes-Oxley: The Pain Ahead)

It is these companies that will either have a 'material weakness' or a 'significant deficiency' as a part of their working, as put across by their auditors. These companies will also see to it that their performances are improved dramatically within the next few years by the method of a total restructuring of their control processes. If similar moves were to be made by all the finance companies in their control processes, then compliance would be achieved as soon as possible, and fraudulent activities in these companies would come to a complete halt, thereby improving the very nature of the corporate world of the United States of America. (Sarbanes-Oxley: The Pain Ahead)

The very purpose of the Sarbanes-Oxley Act that was signed by the American President George W. Bush in the year 2002 being that of inculcating and promoting a greater transparency and lucidity and better control in the entire accounting processes in the several Corporations of the United States of America, all the listed Companies, both CEOs and CFOs were asked to comply by submitting declarations stating the correctness of their accounting processes, and any willful misinterpretations would be punishable by the imposition of fines amounting to $5 million and/or imprisonment for up to 20 years for the offender. Therefore compliance was a must even though some companies felt that it was quite a time and energy consuming process. When compliance to the Sarbanes-Oxley Act is achieved completely, then the Corporation must take it upon itself to maintain this type of transparency in its day-to-day working and running of the company. This may include the basic knowledge of the various problems within the company, the complete and the thorough control of the various processes involved in the day-to-day running of the Corporation and the comprehensive management of risks at all the levels of working of the Corporation. (Sarbanes-Oxley: www.egip.com)

Therefore, all Corporation in the United States of America were expected to comply with the Sarbanes-Oxley Act in areas such as the certification of the financial reports by CEOs and the CFOs, the imposition of the ban on offering and granting personal loans to all Executive Officers and Directors of the corporation, the speeded reporting of trades by the insiders of the corporation, the imposition of certain prohibitions as states by the Sarbanes-Oxley act, like the prohibition on insider trading especially during certain times like for example during pension funds black out times, the disentangling and the disgorgement of the CEO and the CFO profits and compensations, the provisions of additional disclosures, the granting of a certain amount of independence to the auditor, like for example, allowing him to take the liberty of banning out rightly some kinds of work as well as certain pre-certifications of other forms of non-audit work by the corporation's Auditing Committee. The Sarbanes-Oxley Act can also handle the several security violations faced within the Corporations by providing the Corporations with the facility of imposing civil and criminal penalties wherever applicable. (Sarbanes-Oxley Act: www.bambooweb.com)

These were a few of the scandals that swept the Corporations of the United States of America during the period of 2000 to 2002 that led to the necessity of the Sarbanes-Oxley Act and its imposition and its period of compliance, whether the corporations approved of it or not. Quite a few major companies in fact admitted to having falsified their accounts to their own advantage, and mis-stating their real and actual status to the trusting public. In Public Companies, such misrepresentations can be termed as actual 'frauds' and therefore punishable by law. A series of investigations carried out by the U.S. Securities and Exchange Commission during that period unraveled frauds amounting to more than billions of U.S. Dollars. One such fraud was that perpetrated by the famous 'Xerox Corporation', also known as the 'Document Company', that is the world's largest supplier of office paper-copier machines to companies all over the world.

It was during the early1960's that the company attained prominence and the status of being one of the better manufacturers of copier machines in the world, when the Xerox 914 was launched. After this event it was a roll in fame for the company as it began to expand and branch out to many parts of the U.S.A., including a research center named the Xerox Palo Alto Research Center started in the year 1970 in Palo Alto, California, USA. By the early 1980's the company had its hands in a lot of areas, like laser printers and advanced typewriters, only these were launched at the wrong times. For example, when the advanced typewriter was launched, the computerized 'word processor' had already come into the market, and there was actually no place for the typewriter at this time; it was outdated even when it was launched. There followed a gradual decline, and there was an attempted revival in the 19800's to the 19900's at which time the Xerox 'digital photocopiers' were launched with better design and better realignment of its entire product line. (Xerox)

Any advantage in profits that the Company was finally able to enjoy was lost out when the competitors fought to stay ahead or to catch up with the Xerox Corporation. These hundreds of billions of dollars of losses were, however, hidden from public view through a series of fraudulent but at the same time, creative accounting practices. One of these methods was like this. A person can rent out a copier machine; in other words, he does not have to buy it immediately but can acquire it after a specified period of time stated by the company. How must the company account for the income derived from this type of 'rent-to-own' transactions encouraged by it? In any conventional accounting procedure, a standard rental payment is divided into two parts: separating the payment for the copier machine as it was from the payments accrued for servicing and so on.

Therefore the company had the obligation to book the entire return on the first stream, just like it would if it had in fact completed an outright sale of the copier machine, and any payments for the purpose of servicing and repairs would be made separately and cash paid for it. Xerox perpetrated a fraud by booking the entire transaction as one whole income stream by the year 1998, by altering and modifying its own rules according to its own desires for better profits. Investors of the corporation were not told and informed of these changes in rules, and this resulted in them perceiving this as a quick jump in income. In fact, Wall Street made a comment on the working of the Xerox Corporation that it was 'working wonders', and this led to a sudden increase in the stock prices of the company. This fraud was only one of a number of frauds perpetrated by the company, and this had to soon come to an abrupt end when in the year 2002, the fraudulent accounting activities of the Xerox Corporation became a matter of public knowledge and the Securities and Exchange Commission finally charged the company with committing massive frauds and cheating the public. The company not only suffered a loss of its reputation but also had to pay the hefty amount of $10 million as fine. (Xerox)

Another similar accounting scandal that rocked the United States of America during the years 2001 to 2002 was that involving the Energy Trading and Communications Company based in Houston, Texas, Enron. It is said that it was only due to fraudulent accounting activities that the Company was listed as one of the seventh largest companies in thee entire United States of America. Started in the year 1985 with the help of the merger with Houston Natural Gas and InterNorth, its activities included that of the transmission and the distribution of both electricity and gas throughout the U.S.A., as well as the planning and the development of power plants and pipelines all over the world. The pioneering marketing activities and the promotion of power and other related activities and all its risk management devices made the company better known throughout the world, leading to its being named 'America's Most Innovative Company'. There were, however persistent and constant rumors of bribery and a succumbing to political pressures. (Enron Corporation)

The CFO of Enron was indicted in the year 2002 by a Federal Grand Jury for a series of frauds and money laundering and so on. Soon others associated with the company were arrested too, and the result was that Enron suffered a massive loss of reputation and goodwill because it was discovered that almost all its profits and revenues were the result of many deals that it had made with the several limited partnerships that it controlled, to the extent that this large company actually had to file for bankruptcy in the year 2001 after it became better known as the company that suffered the biggest bankruptcy in history, and also the symbol of a well-organized and a well-perpetrated series of corporate frauds. (Enron Corporation)

The scandal of the Pharmaceutical Company 'Bristol-Myers Squibb' is another accounting fraud that rocked America during the same time. This involved the accounting fraud perpetrated by the Company in 2002. (Bristol-Myers Squibb) Some of the other well-known U.S. corporations that were involved in this type of accounting frauds are the CMS Energy, the Duke Energy, the Global Crossing, the Freddie Mac, and the Dynegy. (Accounting Scandals of 2002)

The issue that must be discussed at this stage is whether the Sarbanes-Oxley Act will actually be successful in its goal of eliminating to a large extent all types of fraudulent activities in the large Corporations of the United States of America, and will it be beneficial to the corporations and not an unwanted burden on them? It must be remembered that the Act applies to the various public companies of the U.S.A., and not to the several 'provide companies' that constitute a large number of companies in the country. Public companies are those companies that are registered under the Securities and Exchange Commission. The first part of the legislation states that accounting firms are literally banned and prohibited from offering certain specific consulting services if they are in fact also the auditors of that company.

This is because, according to the legislators, some consulting services do carry with them a certain conflict of interest, and this means that they would find that they would have to carry out their own auditing work for their own firms. For example, they may act as the personnel manager of the company when they actually would be bound to stand outside the general working of the company they are involved in, since they are what is known as 'outside auditors', that is, they must do their auditing work from outside of the company, instead of involving themselves in the inner intricacies of the company. The fact is that through recent years it has been found that the fees gathered from such consulting work is more than the fees recovered for auditing work. This is why this type of consulting services is generally not permitted under the legislation of the Sarbanes-Oxley Act. (Sarbanes-Oxley Act of 2002 -- Conference Report)

When the auditor desires to do consultative work, he must have the prior approval of the audit committee of the corporation where he is an employee, provided the firm does not act as the auditor of the entire corporation. Corporate responsibility for governance standards increase dramatically with this legislation, and all public companies will be required under the law to engage independent audit companies that would take on the entire burden and the responsibility of hiring as well as firing the auditors involved and also setting up the standards for their compensation. Company executives must be ready at all times to disclose their stock sales whenever required to do so, using the system of electronic filing where possible, under the legislation of the Sarbanes-Oxley Act. These disclosures must be assuredly prompt as well as accurate to the last figure or the corporation will be liable for prosecution or fined or both.