Sarbanes-Oxley: Putting Transparency in Corporate AccountingPublish Date: Sep 15, 2009
You've heard the terms thrown around in the news and in the business world, Sarbanes-Oxley, SOX, corporate transparency, accountability, and financial transparency. What exactly do these terms mean and what do they have to do with today's accounting industry?
Sarbanes-Oxley not only required this transparency in the reporting, but now corporations are required to disclose any information on material changes to their financial status or operations.
In the past decade, there have been several major accounting scandals – you've probably heard of the worst of them, such as Enron, Worldcom, and Tyco. These companies had financial reports that made everything look just fine within their corporation. Investors shelled out money for stock in these companies based on these financial reports.
In reality, everything was not just fine in these corporations. The financial statements made the companies look good on paper when they were in bad shape. Not only did these companies collapse and people lost their jobs, but shareholders lost a huge amount of money as a result, and some even lost their life savings.
Senator Paul Sarbanes and Representative Michael Oxley put together legislation in 2002 to prevent accounting scandals such as this. Their goal was to calm nervous investors and assure them that procedures were being put into place to stop these huge scandals from happening again.
The result of the legislation was the Public Company Accounting Reform and Investor Protection Act of 2002 and is commonly called Sarbanes-Oxley, Sarbox, or SOX.
What did Sarbanes-Oxley do within the accounting industry?
Corporate Responsibility for Financial Reports
Sarbanes-Oxley made it no longer acceptable for a CEO to claim ignorance as to the accounting issues. Under the act, corporations must certify:
Internal controls have been evaluated and deficiencies have been reported.
- The corporate officers that sign the report have reviewed it;
- The report is true, not misleading, and contains all necessary information;
- The financial condition of the company is as stated in the financial reports; and
The result is to be a new transparency within corporate accounting.
Corporate financial reporting not only must be accurate and presented accurately, but reports must include all material liabilities or obligations. Corporations are now required to show their true financial status so investors and stockholders can make sound financial decisions based on the information.
Sarbanes-Oxley not only required this transparency in the reporting, but now corporations are required to disclose any information on material changes to their financial status or operations. Not only must they report it, but they must report it in a manner that is understandable and timely.
Keeping It Legal
Sarbanes-Oxley legislation didn't just suggest that corporations follow these guidelines, but it has some "teeth" to it. The legislation imposes significant penalties and fines, including up to 20 years in prison, for concealing information or falsifying records.
The act also set up a quasi-public agency, the Public Company Accounting Oversight Board to oversee, regulate, inspect, and discipline accounting firms in their roles as auditors of public companies. Since Worldcom, Tyco, and Enron were publicly-traded firms, they had independent audit firms reviewing their financial statements – so why didn't the audit firms catch the issues that plagued these corporations?
Sarbanes-Oxley has ushered in a new era of corporate transparency, but detractors from the legislation are frustrated by its over-regulation of private corporations.
One thing that can be said for Sarbanes-Oxley is that it has opened up a new field for accountants and CPAs, and the job prospects are outstanding for those who choose to specialize in the assurance accounting field.