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Why Is Sarbanes-Oxley Act Necessary

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The Sarbanes-Oxley Act is very necessary act put in place to help investors. The Sarbanes-Oxley Act is an act put in place in the early 2000’s by Paul Sarbanes and Michael Oxley. The act was put in place to improve corporate governance and accountability (What is Sarbanes-Oxley Act (SOX)?). The Sarbanes-Oxley act has changed the financial side of corporations. This is because it added criminal penalties for misconduct within a business or corporate and accounting scandals. Some view the act as unnecessary and costly and put American firms at a disadvantage as opposed to foreign firms, others, however, praise the idea of the act and find it to be necessary. It is mandatory that all businesses and employees follow the rules put in place by the act or face punishment such as being fired or even arrested. Sarbanes Oxley Act and Internal Control Sarbanes-Oxley Act changed the financial side …show more content…

The rules state that “public companies must keep an internal control report so that any action taken within the business may be monitored and controlled in case any illegal action is taking place.” The corporations must also “have an outside auditor to evaluate their internal control and report them on the audit report.” The act put a new body in place to “watch over the work of auditors of public companies, called the Public Company Accounting Oversight Board, or PCAOB.” Another provision of SOX is that “accounting firms are not allowed to audit public companies or offer certain consulting services for the same client.” With SOX in place, there are penalties for anyone who violates the act’s provisions. Penalties include “twenty-five years in prison for security Fraud or twenty years in prison for making false statements by an executive.” (Miller-Nobles, T. L., Mattison, B., & Matsumara, E. M.

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The financial scandals in early 2000s caused the Sarbanes-Oxley Act of 2002 to be created. Enron, WorldCom and the accounting firm, Arthur Andersen, to intentionally mislead their shareholders by exaggerating their profits and understating their expenses. The scandals had raised the importance of internal control for enhancing corporate governance. Therefore, the government established the SOX to protect the interest of the investors and employees and to monitor the companies and auditors.

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In 1987 The Committee of Sponsoring Organizations (COSO) which is also referred to as The Treadway Report released the Report of the National Commission on Fraudulent Financial Reporting. Later in 1992 COSO published Internal Control—Integrated Framework which gave corporations a guide to put in place effective internal control. In 2002 the Sarbanes-Oxley Act was passed requiring companies to access the effectiveness of their internal controls. In 2013 COSO released an updated version of Internal Control—Integrated Framework.

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