Effects of Sarbanes-Oxley Act on Accounting - 1100 Words

Effects of Sarbanes-Oxley Act on Accounting (Essay Sample) Content: Effects of Sarbanes-Oxley Act on AccountingName:Course:Institution:Date:IntroductionThe Sarbanes Oxley Act (SOX), instituted in 2002, was propagated by the outcomes of WorldCom and Enron, and the ensuing corporate failures originating from failures in corporate governance. The dwindling investor confidence in large corporations originated the weakening of auditing standards and erosion in standards in financial reporting. The policies were concerned with public entities, and significantly affected accounting as a profession. The outcomes of the Sarbanes Oxley Act are indicated here under. The appointment of an oversight board for accounting in every public entity overseen by the SEC was mandated. Certain regulations were appended to this appointment and the functions of the professionals who constituted the board, including the following statutory provisions, guidelines and frameworks.Increased regulatory basis for corporationsThe provisions of SOX resulted to increas ed and more stringent regulations for corporations (Turley and Howe, 11). The provisions comprised of 66 sections provided a different aspect of reporting and disclosures. The primary concern was the strength and applicability of internal controls in an organization. SOX represented the initial attempt by the government to institute oversight in the accounting profession. The establishment of a Public Company Accounting Oversight Board (PCAOB) created the start point for regulating the accounting profession, in cooperation with the Securities and Exchange Commission. The purpose of the concerted efforts was to protect the interests of investors and other stakeholders through legislation and frameworks which guided the fundamental standards to be followed. The board is comprised of accounting professionals as well as other individuals from different backgrounds (Wegman 20). The body was created to protect investors through improvement of the precision in financial reporting by ensuri ng that accountants and the organizations they operate in are registered, operate on standard frameworks, are inspected regularly and the rules enforced.Internal controlsThe primary tenets on regulation revolved around internal controls, which resulted to prevention, detection and deterrence of fraudulent conduct, especially in accounting. Corporate responsibility in financial reporting was adjusted to indicate practicality in the of controls, especially concerned with establishment and maintenance of internal controls, evaluation of such controls periodically, and through established approaches, establishment of controls to determine materiality of financial information and establishment of additional information to provide directions on the contents of the financial records. This resulted to significant changes in features of financial statements, disclosures and the level of freedom that auditors have when presenting financial information. The CEOs and CFOs were considered to be directly responsible for determination and regulation of internal controls.Regulation of auditingWegman (10) pointed out that the SOX provided a paradigm for regulation of the scopes and interactions auditing functions in the public companies, through the PCAOB. Restrictions of auditors in engaging in bookkeeping, actuarial services, brokerage or dealership, expert or legal services not related to the audit, outsourcing of internal auditing services, management of organizational roles and design of accounting information systems limited the level of influence of auditors in an organization and eliminated the conflict of interest between external auditors and the firms in general and specific terms. Auditor independence also created the need for separation of accounting roles, making it possible for greater oversight and reliability of financial reports. Auditing staff were provided with standards for the procedures of carrying out audits, referencing reports, determining the materia lity of the provisions and information, use of evidence in auditing, and the process of planning audits in order to ensure that the outcomes are reliable. The reliability of the audited reports would be gauged on the procedures used, projections and forecasts of the financial elements, provision of interim results and the inclusion of management report to support the financial reports.Corporate responsibilityAlthough SOX provides guidelines for 11 sections, corporate social responsibility received wide ranging focus, with the aim of ensuring that fraudulent activities are avoided (Clark, 13). The third title in SIX deals in corporate responsibility. Organizations were mandated to certify that the information contained in the financial statements was true and accurate according to their knowledge. The responsibility of the management and auditors extended to the determination of whether the information was accurate, and presentation of the information in the most accurate manner. Cor porate responsibility also extended to the actions of the management regarding compensation and decision making, primarily with regard to decisions that affected the stability of the company. Reasonability for action was directed towards ensuring that on and off-balance sheet activities were disclosed at all points in time, as indicated in Section 401, as indicated by Turley and Howe (6).The Use of foreign GAAPsAccording to Turley and Howe (11), the US no longer follows pro-forma financial information based on non-US standards, primarily due to differences in the standards and provisions in the process of developing such financial statements. Companies operating in foreign countries were required to adjust their financial statements according to the international financial reporting standards (IFRS) in order to ensure unification and harmonization of controls and standards. The resulting comparativeness of the standards in the harmonized statements ensured compliance and ensured th at reconciliation was possible, this made it possible for investors and other stakeholders to understand the filings by companies, without nec...