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Explain the Sarbanes Oxley Act (SOX) of 2002 , its purpose and content of the Act. Describe the entities/agencies responsible for implementation of the Act. Discuss the impact SOX has had on management’s responsibilities and financial reporting responsibilities.

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Answer 1

Sarbanes Oxley (SOX) Act was an act which was introduced to protect the right of the investors, shareholders as well as employees. This law was mostly intended to check the financials of a company. Any person who wants to invest in any company would first see the financial statements and then only they would decide whether to invest in the company. A company's financial statements include many things including various financial ratios, income statement as well as balance sheet. These form the basis for domestic as well as foreign investments, borrowing and public listing. However, companies in the past have resorted to various techniques such as false accounting, inflating the existing value of assets to an unimaginable figure and reducing the liabilities as much as possible thereby making the investor look like a fool. The investor is amazed by such numbers and eventually invests. This mainly happens due to excess greed of people. Enron scandal is one of the most reputed scandals that has rocked several people in the world. It was a major failure in the part of Corporate Governance as well as Audit practices.

Enron created a perfect example of accounting fraud in the history of scandals and that too willful fraud. Enron went through the concept of perceived profitability and hence its stock prices soar up. It acquired assets who were not even capable of generating returns and included to be acquired future assets in the books of the companies which inflated the figures of assets as compared to the liabilities. Enron showed as if those assets are generating a lot of profits and hence, people's expectations in Enron pushed the stock prices high.  

SOX Act was mainly used to prevent scandals like Enron from happening in the future. It contained several sections from corporate governance responsibilities to corporate penalties and punishments.It also requires the securities exchange to comply with the law and implement regulations too.

The SOX Act was enacted by the 107th United States Congress on July 30th, 2002. The SOX act had several impact on management and financial reporting responsibilities:

• There cannot be influence on conduct of audits by any officer or director. Any such influence shall be dealt in the court of law with severe penalty.
• Any changes in the Balance sheet shall be disclosed to all the shareholders of the employee and Securities exchange shall investigate it separately.
• Any kind of misleading/falsification/destruction/alteration in any financial document or record shall be liable to imprisonment of not more than 20 years.
• Organization should have a set of internal procedures properly documented to make sure that there is accurate financial reporting done by the board as well as the management. Signing officers must take the onus of maintaining such internal controls. The same has to be checked by external auditors that proper internal procedures were maintained or not.