Question

Sarbanes-Oxley Act. Why did congress pass the Sarbanes-Oxley Act?
What is its purpose? How is it enforced? Please add Applicable Biblical passages and
references, if possible.

Answer 1

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (SOX) helps ensure the accuracy and integrity of companies’ financial records. In the case of SOX, however, the information is specifically meant to benefit public companies’ investors. Investors make decisions based on the reports, disclosures, and financial statements provided by corporations. The investors depend on the accuracy of these documents. The act ensures that the information presented in them is complete, accurate, and compliant with securities laws

Why did Congress pass this legislation?

(a)Congress passed the Sarbanes Oxley act under the bush administration as a result of corporate scandals that had shaken the trust of American investors. In 2002 Enron a blue chip energy utility went bankrupt as a result of devious accounting practices which had allowed them to report future earnings on present balance sheets regardless if future earnings had been seen or not. This allowed Enron to inflate their profits year after year regardless if their projects made any money. Another scandal includes WorldCom which was one of the largest internet and telecommunications company at the time. WorldCom was purposely recording bandwidth expenses as assets in order to make their balance sheet appear more profitable than it actually was. These scandals along with many more pressured congress into passing the Sarbanes Oxley legislation.

What is its purpose?

The main purpose of the Sarbanes-Oxley Act is to make sure that the information given by the companies are reliable, truthful, honest and justified. In the wake of financial scandals, the legislators had to legislate The Sarbanes-Oxley Act to gain a positive image by obeying the regulations and restore investor and public confidence after the financial reporting scandals, and to enforce corporate governance and the financial reporting

How is SOX enforced?

The Sarbanes-Oxley Act is enforced by the Securities and Exchange Commission (SEC); SOX relies on the SEC to implement rulings in accordance with the law. The Sarbanes-Oxley Act aided in the restoration of investor confidence by strengthening enforcement of the federal securities laws. The ACT authorized the SEC to issue implementation rules on many on its provisions intended to improve corporate governance, financial reporting and audits functions. Additionally, SOX created the Public Accounting Oversight Board to aid in the enforcement of their mandates

The key provisions of the SOX that have the potential to reduce the likelihood of audit failure can be summarized as follows: 1.Activities of the PCAOB;

2.New rules for audit committees;

3.New criminal penalties and protection for whistle-blowers;

4.Limits on auditor consulting; and

5.New financial reporting and auditing procedures.

Section 201: deals with services outside the Scope of Practice of Auditors: Prohibited Activities

Section 302: deals with corporate Responsibility for Financial Reports

Section 404: deals with management Assessment of Internal Controls