FR U1IP

Sarbanes-Oxley Act
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Introduction
Sarbanes-Oxley Act of 2002 commonly abbreviated as SOX or Sarbox is a federal law in the United States sets new requirements for all public companies boards, corporate governance, and the public accounting firms (Jain & Rezaee, 2016). It was enacted on July 30, 2002, and it is also known as Investors Protections Act or transparency Act as it intends to protect the interest of the investors. The Act also has got provisions that apply to the private firms such as intentional destruction of evidence to compromise a federal investigation.
Development
Sarbanes-Oxley Act of 2002 was developed to protect the shareholders and restore trust in the public companies following the mega accounting scandals that took place in the early 2000s (Jain & Rezaee, 2016). Investors lost much of their funds in the commonly known Enron, WorldCom, Arthur Anderson, and many others Scandals which led to the need for regulation of the public corporations. The various section of the Act describes how the board of directors in the public companies should carry the responsibilities in a case of misconduct. The bill was named after its sponsors Paul Sarbanes and Michael Oxley whose primary aim was to ensure that the top management of every firm certifies the accuracy of the financial information. The Bill has got eleven sections, and it proposes penalties to be applied in case of the fraudulent financial activities or non-compliance with the law in financial reporting.

The Impact of the Sarbanes-Oxley Act of 2002 on Financial Reporting
Following many accounting scandals in the most of the business entities in the US, Sarbox 2002 was established to refurbish the buoyancy of the investors in the financial markets. The Act closed all the possible loopholes that most companies were using to defraud the shareholders. The significant impact of the Sarbox Act on the business entity’s financial reporting include strengthening the audit committees, strengthening the company’s disclosures, undertake internal control test as well as making the directors and top officers personally liable for the accuracy of the financial reports.
Strengthening the Audit Committees
The primary effect of the SOX Act of 2002 was to enhance the public companies’ audit committees. It provided the committees with a wide range of leverage to oversee the accounting decisions of the senior management. The SOX 2002 sec (II) provides for the auditor’s independence (SOX, 2002). The audit committees of the companies need to be independent of the management, and they should focus on approving the corporate accounting practices and handling the complaints from the external auditors. This provision strengthens the audit committee by providing the audit committees with much control of the company’s financial reporting.
Strengthening the companies disclosures
Sarbanes-Oxley Act affirms the requirements for disclosures made on the financial reporting. Part IV emphasis on the financial disclosures where the firm is required to indicate material transactions that are not captured in the financial statements. Public companies are obligated to disclose any material arrangements that are not indicated on the balance sheet such as the operating lease or any other special entries that are not indicated in the financial statements. Stock transactions with the securities exchange commission (SEC) also need to be disclosed in the reporting cycle (Marques, 2016).
Enhancing internal control test
Sarbanes-Oxley provides that public companies should perform extensive internal control tests for improved accuracy in the preparation of the financial reports. The strong internal control system is essential in minimizing fraudulent cases within the business. It will be much easy to detect and prevent such frauds (Schaeffer, 2015). The internal control ought to be effective for both manual and automated systems.
Hold the management responsible for the financial reporting process
The Sarbox Act of 2002 requires that the top managers should personally approve the accuracy of the financial reports. This aims at ensuring that the information given is a true financial position of the company and it does not mislead the public. If the top managers and officers make intentional false certification of the financial reports, they can face a criminal charge individually (SOX, 2002). Directors who are found to have omitted this provision can also be prohibited from serving in any other public companies.
Imposes harsher punishment
The Sarbanes-Oxley Act suggests harsher punishment for the justice violators and securities fraud. The primary goal of SOX is to protect the interest of the investors by managing the agency conflict between the managers and the shareholders (Jain & Rezaee, 2016). The Act provides maximum imprisonment of 25 years for securities fraud and a maximum of 20 years for obstruction of evidence. This helps to promote the accuracy level in the financial reporting of the public companies and the parties concerned will take appropriate measures to avoid facing the harsh consequences by committing the offense.
Audit Partner Rotation
Following most mega scandals, Sarbanes-Oxley of 2002 was formed to ensure a periodical rotation of the audit partners. The Public Company Accounting Oversight Board established under Sarbox provides that public audit partner should be rotated in every five years across the companies. For instance, the Enron scandal took place despite the fact that the firm has been audited by one of the world’s largest audit and accounting firms of the period Arthur Anderson. The external auditor was in partnership with the company’s senior directors where a false audit report was issued to mislead the users (Bottiglieri, Reville & Grunewald, 2014). With the proposed Audit partner rotation, the auditor independence is improved as well as the accuracy of the financial reporting.
Conclusion
Sarbox Act of 2002 has a significant impact on the process of the business entities’ financial reporting. The primary aim of the Act was to ensure proper protection of the shareholders in the financial market. It can be achieved with appropriate regulation of the public companies financial reporting. The Act strengthens the financial literacy and the independence of the corporate accounting boards. The act also guarantees job protection to the whistle-blowers who reveals the fraudulent activities in the business entity.

References
Bottiglieri, W., Reville, P., & Grunewald, D. (2014). The Enron collapse – The aftershocks.Journal of Leadership, Accountability and Ethics, 1- 9. Doi: 1864838831
Jain, P. K., & Rezaee, Z. (2016). The Sarbanes-Oxley Act of 2002 and capital-marketbehavior: Early evidence. Contemporary Accounting Research/Recherche CompatibleContemporaine, 23(3), 629-654.
Marques, A. (2016). SEC interventions and the frequency and usefulness of non-GAAPfinancial measures. Review of Accounting Studies, 11(4), 549-574. Doi: 1169512511
SOX 2002. U.S. Securities and Exchange Commission (Documents Page).Retrieved May 19,2011, from www.sec.gov/about/laws/soa2002.pdf
Schaeffer, M. S. (2015). Accounts payable and Sarbanes-Oxley: strengthening your internalcontrols. Hoboken, N.J: Wiley.