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Case Study: A Prime on Sarbanes-Oxley

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Case Study: A Primer on Sarbanes-Oxley
Case Study: A Prime on Sarbanes-Oxley
The purpose of this research is to impart a scholastic opinion on the topic of the issues
and activities covered in the Sarbanes-Oxley (SOX) Act that should be considered and acted
upon as ethical and voluntarily resolved, the estimated additional cost as a result of the
implementation of new SOX requirements, and last but not least, the list of the governing
practices that should be communicated to companies to stay in compliance with the SOX.
In 2002, Paul Sarbanes, a Democratic senator from Maryland, and Michael Oxley, a
Republican congressman from Ohio, presented a bill in their relative bodies which would bring
forth legislation to regulate the misleading affairs of the publicly traded companies (SOX-online,
2012). The SOX Act was ratified by the United States Congress to safeguard the interests of the
shareholders against potential devious accounting activities by public companies, by bringing in
austere reforms with the objective of getting the factual fiscal information disclosed by
companies, thwarting accounting chicanery, in view of the accounting frauds perpetuated by
WorldCom and Enron, that shook the confidence of the shareholders on relying financial
statements that ultimately required a revamp of financial governing standards (Investopedia,
2012). Disclosing the financial results truly is significant and vital for investors, consumers,
competitors, and government agencies that make use of these reports. The veracity of financial
reporting is, therefore, cardinal to boost the confidence in the legitimacy of the capital markets.
Authentic financial statements enable investors and creditors to assess the fiscal situation of any
company that assist them to make judicious judgments about their future investments in the
company. The authenticity and reliability of a company are essential because it warrants the
boards of directors to appraise management’s efficacies and take timely remedial actions if
needed, to increase the financial viability of the company. Therefore, it is fairly important for all

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Case Study: A Primer on Sarbanes-Oxley
publicly traded companies to provide an apprehensible, absolute, and conscientious
representation of their financial condition and performance.
Several issues and activities are covered in the SOX Act to make financial reporting of the
public companies as transparent as possible. Firstly, the SOX Act enacted the law to create a
Public Company Accounting Oversight Board (PCAOB) which is a nonprofit corporation to
supervise the audits of the publicly traded companies in order to safeguard the interests of the
shareholders, creditors and public agencies by advocating meaningful, kosher, and autonomous
external audit opinion, which also require the auditors of the public companies to be subject to
external and independent surveillance for the first time in the history of capital markets
(PCAOB, 2012). Secondly, the SOX Act dictates more meticulous guidelines of sovereignty for
the public accounting firms and requiring external auditors not only to inculcate themselves with
accounting dogmas but also must acquire information technology acumen in order to contend
with the accelerated technological world. The SOX Act also explains that some distinct services
as being prohibited from the scope of external audit practices. The public accounting firms that
furnish audit services cannot, simultaneously, provide non-audit services, such as bookkeeping,
financial information system design and implementation, appraisal or valuation services, fairness
of opinions, actuarial services, internal audit outsourcing services, management and human
resource functions, broker or investment banking services, legal services, and expert’s services
not related to the external audit (Jennings, 2011). Another stipulation instituted by the SOX Act
is regarding the formation of an audit committee necessitating all the affiliates of the audit
committee to be the members of the company’s board of directors, and to be independent. One of
its members should be a financial expert too. The chief financial officers (CFO) and chief
executive officers (CEO) of publicly traded companies are obligated to personally authenticate

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Case Study: A Primer on Sarbanes-Oxley
all financial and internal control disclosure as well as material accuracy and sufficiency of their
company’s financial statements (Legalzoom, 2012). One the reasons that the SOX Act was
enacted was that before the implementation of the SOX Act, publicly traded companies
promoted a pattern of window dressing of their financial statements and also abstained to reveal
the actual state of financial as well as internal control, as it would unfavorably influence their
stock price. Therefore, the SOX Act instituted rules to improve financial reporting by compelling
key financial executives of not only to report accurate financial status but also to examine and
refine their financial controls and to communicate to the public of any shortcomings. In addition
to that, a company cannot make personal loans to corporate executives unless it is in the business
of making loans (Albrecht, Albrecht, Albrecht, & Zimbelman, 2011). The SOX Act also requires
the disclosure of off-balance sheet transactions that may have a current or future material effect
on the company’s financial condition, results of operations, revenues, expenses, liquidity, capital
expenditures or capital resources, and also may disclose the likelihood of occurrence of any
future event with imminent material effect on the future operations of the company (Kaufer &
Dubinsky, 2003). The SOX Act also implemented rules regarding disclosures of conflict of
interest by analyst. The analysts are required to disclose whether he or she holds any securities in
the company or received any remuneration (Legalzoom, 2012). The Sox Act also known as
Corporate and Criminal Fraud Accountability Act of 2002, imposes penalty or imprisonments of
up to 20 years to any individual, if found guilty of altering, destroying, concealing or falsifying
records or documents with the intent of influencing a federal investigation or bankruptcy case
(Jennings, 2011). Also, any person who wittingly circumvents shareholders of publicly traded
companies is subject to fines or imprisonment (Marden & Edwards, 2005). The Act also provides
protection to employees if they reveal facts about their company’s false financial reporting

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Case Study: A Prime on Sarbanes-OxleyThe purpose of this research is to impart a scholastic opinion on the topic of the issues and activities covered in the Sarbanes-Oxley (SOX) Act that should be considered and acted upon as ethical and voluntarily resolved, the estimated additional cost as a result of the implementation of new SOX requirements, and last but not least, the list of the governing practices that should be communicated to companies to stay in compliance with the SOX. In 2002, Paul Sarbanes, a Democratic senator from Maryland, and Michael Oxley, a Republican congressman from Ohio, presented a bill in their relative bodies which would bring forth legislation to regulate the misleading affairs of the publicly traded companies (SOX-online, 2012). The SOX Act was ratified by the United States Congress to safeguard the interests of the shareholders against potential devious accounting activities by public companies, by bringing in austere reforms with the objective of getting the factual fiscal information disclosed by companies, thwarting accounting chicanery, in view of the accounting frauds perpetuated by WorldCom and Enron, that shook the confidence of the shareholders on relying financial statements that ultimately required a revamp of financial governing standards (Investopedia, 2012). Disclosing the financial results truly is significant and vital for investors, consumers, competitors, and government agencies that make use of these reports. The ...
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