Compare and contrast the views of management and accountants regarding the changes required by the Sarbanes-Oxley Act on internal controls and how these changes have affected corporations, accounting firms, and investors.
The signing of Sarbanes-Oxley Act (SOX) into law in 2002 focused on public confidence restoration in corporate financial statements, through financial legislation and regulation of security markets. Before enacting of the Act, investment experienced significant losses as a result of corporate failures in the process of carrying out their operations. Therefore, the establishment of the SOX was to address accounting fraud issues, with an attempt to ensuring an improvement in the reliability and accuracy of corporate disclosures (Jahmani, 2002).
In the comparison of the present view and the past view of business operations, the auditors are responsible for analyzing financial statements of a given organization. This exhibits similarity concerning the changes requirement by Sarbanes-Oxley Act, however, in contrast, the Act resulted in an increase in the accountability of the auditors in any given company’s management thus ensuring professionalism in their service delivery. Secondly, the view of the administration and accountant in the past involved cases of frauds within the institution, the Act objective was to curb such cases of severe financial scandals that were dominant in organizations, consequently affecting the public’s opinion on financial institutions (Greene, 2004). In contrast, the establishment of the Act significantly reduced cases of fraud at the institutions. Financial malpractices lead to the collapse of even large firms such as Enron and WorldCom, due to their involvement of massive accounting frauds and moreover failing to follow the terms of federal security laws which required mandatory disclosure provisions (Greene, 2004). These fraud cases cause investors and taxpayers to incur massive amounts of losses. Statistics indicate that investors lost approximately $900 billion between the years 1997 to 1994 due to 30 massive accounting frauds, while in contrast, the signing of the Act, significantly reduced such losses resulting due to fraud.
The comparison of the view of management and accounts is that they both exhibit professionalism, however, in the past, the accounting professionals lacked effectiveness in their job performance. These are manifested by the auditors who made compromised their independence resulting to the anomalies in their accounting records, raising questions to the public on the loss of independence among the auditors. This contrasts the establishment of the SOX, where its primary focus was to restore public faith concerning published financial statements by ensuring records reliability to the public (Jahmani, 2002). The public had lost confidence in the independence of the auditors, and consequently, they could not depend on their records. There is, therefore, a contrast in the case of the introduction of the Act, whose target was ensuring no financial malpractices and that the public should thus rely on the records. Moreover, through their actions of monitoring any irregularities, it provided that no cases of financial scandals should arise in any given institutions. In contrast to the past view of management, there were irregularities due to lack of monitoring of the company’s performance. The Act further limits interaction as well as the service scope which the auditors in a firm can provide to the public enterprises (Jahmani, 2002). This contrasts the previous system where there was interaction between the accounts and their respective organization
The Sarbanes-Oxley Act, therefore, resulted in positive changes within business corporations, in contrast, management view initially where business operations were characterized of numerous challenges. The Act’s impact was, therefore; the reliability of financial information’s, through its focus on restoring public confidence, the internal control must, therefore, produce reliable financial reporting during its business operations. This contrasts the deficiencies of the internal control initially, where the auditors did not provide the investors with information on their records. Secondly, the Act resulted in the strengthening of corporate Governance unlike the initial view of management which was poorly managed (Greene, 2004). The institutions which exhibit strong corporate governance ensure its employees conduct show professionalism and discipline. These organizations will possess ethical values resulting to the employees’ effectiveness in performance.
The Act further led to the increase in the independence as well as the size of the board of directors, and this is due to its effectiveness in financial reporting and control mechanism. The directors and managers turnover is therefore increased (Greene, 2004). The company’s focus on the regulatory compliance consequently heightens. Moreover, the establishment of the Act led to the reduction of financial statement fraud. In comparison to the time before its enactment, there were deliberate financial statements frauds. The Sarbanes-Oxley Act, therefore, has a positive impact as it significantly led to a decline in incidences of fraud, while in the past there were enormous challenges of fraud. Besides the implementation of SOX’s requirements resulted in an improvement in the market liquidity (Jahmani, 2002). The Act, therefore, focus on contributing towards the business success of a given company, addressing on the past challenges in the business operations due to the management inefficiency.
Greene, E. F. (2004). The Sarbanes-Oxley Act : analysis and practice. New York: Aspen .
Jahmani, Y. (2002). The Impact of Sarbanes-Oxley Act. New York: University Press.