This paper examines the Sarbanes-Oxley Act of 2002 (SOX) and its wide-ranging effects on publicly traded companies and the accounting profession. It introduces the key regulatory actors — the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB) — and outlines their interrelated roles. The paper then evaluates both the costs and benefits of SOX compliance, including the financial burden of independent audits, the trend of companies going private to avoid compliance costs, and the broader ethical implications of legislating transparent accounting practices.
The accounting discipline has taken a public relations beating over the past few years as a result of corporate accounting scandals, and much of that criticism has been well-deserved. Regulations regarding conflicts of interest, independent monitoring, reporting, and full disclosure to stockholders were thin at best, and in many cases were not enforced even when they did exist. The corporate accounting scandal wave changed that; public outcry for accountability resulted in Congress passing the Sarbanes-Oxley Act of 2002. This act contains many new regulations that have a profound effect on publicly traded companies, and that will directly affect this team and your corporation.
First, a quick summary of the key actors involved. The FASB, or Financial Accounting Standards Board, and the Securities and Exchange Commission (SEC) have a mutually reciprocal relationship. The FASB issues accounting standards — known as Generally Accepted Accounting Principles (GAAP) — which govern accounting operations throughout the United States. The SEC, as the enforcement and investigative arm of the federal government in the financial arena, enforces those standards. Although the FASB is not an official government body, operating independently, its standards carry the weight of law through the SEC's enforcement authority.
A third actor is the Public Company Accounting Oversight Board (PCAOB). This independent board was created as a direct result of the Sarbanes-Oxley Act to independently monitor and regulate accounting practices in the public realm. The PCAOB is a non-profit, private corporation whose sole purpose is to protect the public by ensuring full transparency and accurate financial reporting by publicly held corporations.
With those three actors in mind, it is worth examining the Sarbanes-Oxley Act (SOX) itself. The question most immediately on the minds of executives is how much independent audits and employee man-hours will cost. Some figures indicate that the average audit has run approximately $2.4 million higher than prior to SOX's enactment. These high prices can be partly attributed to the shortage of experienced auditors, leaving fewer professionals to handle more work — and charging accordingly. The financial cost is, by far, the most obvious drawback of SOX's implementation.
The benefits of SOX, however, are just as compelling as the arguments against it. The increased transparency it requires is not only for the benefit of shareholders; company executives and government bodies will also benefit from the complete financial picture that SOX's provisions demand. Greater transparency encourages better management and more disciplined cost control. The Act was initially designed to rebuild investor confidence, and its impact in that regard can be tracked through investment figures over time.
"Companies go private to avoid SOX compliance costs"
"SOX creates ethical separation between managers and auditors"
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