The corporate world represents a complex organism with various mechanisms and parties involved in its operations and potential risks that they impose. Fraud is a common practice within the corporation, and when massive scandals are shaking the world, it emphasizes the need for action and regulations to control this environment. When the global arena experienced a series of fraudulent events, such as Enron, Tyco International, WorldCom, and others, the Sarbanes-Oxley Act of 2002 (Sarbox or SOX) was enacted (Sarbanes-Oxley Act, 2002). The purpose of this paper is to observe the original provisions of this legislation and influence on the modern corporate world.
The analyzed act served as a response to monitor financial operations within the corporation, screen auditing activities, and implement internal control within businesses. One of the most critical parts of the bill is section 302, which provides disclosure controls. Hence, it requires “a set of internal procedures designed to ensure accurate financial disclosure” (Sarbanes-Oxley Act, 2002:7). Thus, this provision aims to guarantee the trustworthiness and reliability of the reports prepared by companies. SOX 302 points out the significance of senior auditors evaluating the effectiveness of the company’s financial control and reporting their conclusions, ensuring that they comply with Securities and Exchange Commission requirements (Sarbanes-Oxley Act, 2002). Consequently, if a signing officer approves falsified information, they can incur substantial penalties and charges for not following the regulations.
Another crucial provision imposed by Sarbox is section 404 that talks specifically about the evaluation of internal control. Curiously, this part is based on the practices utilized by Enron and Lehman Brothers that used off-balance-sheet instruments to conduct fraudulent activities (Sarbanes-Oxley Act, 2002). This particular provision requires companies to produce internal control reports, in which the management bears the responsibility for establishing the adequacy and accuracy of internal procedures (Sarbanes-Oxley Act, 2002). In other words, the introduced legislation requires corporation to assess their financial reports. Besides, this section imposed significant challenges for the businesses because it implies substantial costs (Sarbanes-Oxley Act, 2002). Therefore, it is possible to say that this provision faced discontent from companies, as far as it requires highly resource-consuming procedures.
Another vital section of the bill is related to the consequences that the parties will have to encounter if they violate the rules presented by SOX. Part 802 imposes the most significant recordkeeping regulations mentioning falsifications, retention, and storage (Sarbanes-Oxley Act, 2002). In such a way, the players in the corporate world have to comply with the guidelines imposed by the legislation carefully, or they will have to respond to their actions. Sarbox suggests that if anyone knowingly breaches the bill’s requirements, they shall be fined or “imprisoned not more than twenty years, or both” (Sarbanes-Oxley Act, 2002:9). This section of legislation presents essential aspects of the regulations, as it precisely outlines how the recordkeeping should be performed and what are the risks of conducting fraudulent activities.
It is critical to mention that the Sarbanes-Oxley Act of 2002 has numerous implications for the way the companies operate and the challenges that they face due to the imposed requirements. For instance, one of the aspects crucial for corporate development is the focus on innovation. SOX established the need to have independent directors on the board of the corporation, which critically influences decision-making within organizations (Gu and Zhang, 2017). As a result, the rigid environment can provide new opportunities for innovative activities within the companies. Hence, corporations can have advantages “from improved corporate governance and effective monitoring by independent directors” (Gu and Zhang, 2017:28). In conclusion, Sarbox is an influential tool in the corporate arena, which has various consequences, reaction, implications, strives to reduce the level of fraud, avoid future financial scandals, and enhance innovation.
Reference List
Sarbanes-Oxley Act (2002) Web.
Gu, Y. and Zhang, L. (2017) ‘The impact of the Sarbanes-Oxley Act on corporate innovation’. Journal of Economics and Business, 90, pp. 17-30.