The Sarbanes-Oxley Act of 2002 imposed significant changes with regard to the aspects of corporate governance as a responding mechanism to address the increasing cases of corporate mismanagement, managerial issues and cases of misrepresentation by the executive board members (Brigham, & Ehrhardt, 2011). The legislation was passed with high hopes of developing managerial controls that would prohibit the management from manipulating the firm’s financial placement to the disadvantage of the company’s creditors, the government, investors, and the larger public. The main concern regarding the Sarbanes-Oxley Act is whether it offers effective frameworks for preventing the falsification of a firm’s financial statements or not. For instance, after the collapse of the Enron Corporation, there was a necessity for changes in practices for corporate governance and auditing. The main ideas of the required changes were directed at ensuring the credibility of the financial statements (Brigham, & Ehrhardt, 2011). There were many reasons for changes, such as various accounting problems and obstacles in conducting quality audit procedures. These and many other reasons resulted in the adoption of the Sarbanes-Oxley Act of 2002. In the article, the Act explores the changes that the legislation has imposed on the boards of the corporations found in the United States. This paper critiques the article and discusses how it is related to financial management.
The author states that the Sarbanes-Oxley Act offers a precise mandate for publicly owned corporations to implement reforms in financial management to avoid manipulation and distortion of financial statements by the directors and the management team. The act provides clear auditing practices for public corporations (Valenti, 2008). The Sarbanes-Oxley Act has stated the following rules for auditors and audit committees. First of all, the companies bear responsibility for independent auditing. Auditors and audit committees should not offer other services different from their direct responsibilities. Therefore, the companies are unable to ask auditors to cope with management, complete investment pieces of advice, etc. The restrictions are put on the employment of auditors, who are forbidden to occupy chef positions in the companies they have served within one year. An auditor oversight board should be organized based on SEC review in accordance with new legislation. The financial statement in public organizations has been regulated and firm restrictions have been applied. The company should be responsible for increasing its auditing information, especially if the company is covered in a special list or belongs to a public one. Moreover, the Act is directed at revealing off-balance-sheet transactions the company implements. The companies should understand that the violation of the Act means a violation of the federal law and leads to punishment, either a fine or imprisonment, depending on the cruelty of the violation. The Act under discussion states the level of penalties (Valenti, 2008).
Thus, the main idea of the Sarbanes-Oxley Act of 2002 is to regulate the behavior of the accountants and the companies which require accounting services. The revised Act is aimed at outlining the accounting and non-accounting services, the ones which can be completed by accountants and those which are not, and at eliminating the compromising of audit independence (Valenti, 2008). The new act defines policies, procedures, and practices audit companies can and should perform, their actions and penalties in case of law violation.
References
Brigham, E. F., & Ehrhardt, E. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.
Valenti, A. (2008). The sarbanes-oxley act of 2002: Has it brought about changes in the boards of large U. S. corporations? Journal of Business Ethics , 81 (2), 401-412.