The Sarbanes-Oxley Act and Its Significance
Introduction
The Sarbanes-Oxley Act (SOX) is a US federal law administered by the Securities and Exchange Commission and adopted to protect investors from fraud. Its primary purpose is to improve the reliability of financial reporting and audit quality. SOX requirements relate to internal customer controls for the preparation and review of financial statements and, in particular, controls affecting the accuracy, completeness, efficiency, and public disclosure of material changes related to reporting.
Management and Accountants’ Views on Change
The benefits of SOX compliance, including increased quotes, lower interest rates, and the attraction of foreign investors and partners, far outweigh the cost of enforcing the law over time. Companies and workers correspondingly report a reduced risk of material misconceptions after implementing SOX controls. What is more, executives, managers, and accountants point out that this particular law offers a comprehensive approach to auditing and dealing with the potential problems created by fraud (Gorshunov et al., 2020)? It also provides adequate, though somewhat harsh, penalties for misconduct and is the most radical in this area among market economies.
Changes Affecting Corporations, Accounting, and Investors
The goal of the law was to provide tools to protect investors when businesses attempted to manipulate financial reporting. The reason was that before, a corporation used to prepare financial statements in such a way as to hide problems and shortcomings and to demonstrate false profits to investors. As a result, its misled investors, and they lost assets (Act, 2002). It should be mentioned that the law had a positive and a negative impact on key players in the market. That is why the norms and provisions of the act introduced a serious allocation of responsibility for financial reporting among the company management.
The difference was that earlier, the leadership of corporations acted in their interests because there was no mechanism for assigning responsibility to them. Accordingly, their corporation, as a legal entity, was accountable for all of the management’s dishonest actions. After SOX, executives should be responsible for inaccuracies and manipulations in financial accounts. Moreover, companies must establish internal controls that are intended to restrain any misbehavior by corporations (Act, 2002). Hence, management is now completely responsible for the information provided by the company. This has led to positive changes for investors who have received confirmation of the truthfulness of the reports.
In addition, it is equally vital to consider the opinion of accountants whose activities are directly related to the law. First of all, because of the grade of the internal control mechanism, many more processes have emerged in the company. They, in turn, influence internal and external accountants as well as auditors. In this regard, a positive point consists of the increased reliability of financial controls and a well-organized inner structure (Gorshunov et al., 2020). Accountants state that the work has become more complicated because now they need to comply with many standards in accounting for income and expenses. However, at the same time, they speak of increased efficiency and positive dynamics for corporations and investors. The reports have become much more accurate; the data and figures are appropriate and have fewer distortions. Moreover, due to the changes in the law, accounting firms are now held responsible for providing information and must comply with all necessary principles. Thus, investors bear much less risk and have reliable protection against fraud or possible errors.
Conclusion
Thus, the Sarbanes-Oxley Act, or SOX, was created to restore fairness to the economy. Furthermore, the significance lies in investors getting additional guarantees of business security gratitude to the adopted law. Correspondingly, the regulation of internal control has a double effect because the audit companies gain a more substantial share of the market, but at the same time, they spend more on assets. Thus, this specificity allows for additional security guarantees for investors.
References
Act, S. O. (2002). Sarbanes-Oxley Act. Washington DC.
Gorshunov, M. A., Armenakis, A. A., Feild, H. S., & Vansant, B. (2020). The Sarbanes-Oxley Act of 2002: Relationship to magnitude of financial corruption and corrupt organizational cultures. Journal of Management, 21(2), 73. Web.