Sarbanes-Oxley Act of 2002 Adoption as a Crucial Piece of Legislation Essay

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The implementation of the Sarbanes-Oxley act of 2002 is an important piece of legislation. The research focuses on the punishment of corporate officers and external auditors found conniving and conspiring to defraud the investors and other stakeholders by presenting false income statements and balance sheets. The research focused on studying prior accountings scandals as triggering events precipitating the enactment of the Sarbanes-Oxley Act of 2002. The research focuses on the auditing oversight committee. The Sarbanes-Oxley Act aims to significantly decrease and stop the preparation of fraudulent financial statements.

According to Debra de Vay (2006), the Sarbanes Oxley Act of 2002 is an important piece of legislation. The law was crafted by United States Senator Paul Sarbanes (D –MD) and United States Representative Michael Oxley (R –OH). The law was approved and implemented in 2002. The accounting scandals that rocked the United States precipitated the compulsory creation of a law that would bring back the public’s trust in the financial statements, the external auditors, and the corporations. The law only focuses on companies offering their stocks within the United States stock exchanges. The law does not cover private companies not offering their stocks in the stock exchanges.

According to Theodore Plette (2008), the 200 laws created the Public Company Accounting Oversight Board or PCAOB. The board registers external auditors, inspects, and determines if the companies are complying with all the provisions of the Sarbanes-Oxley Act of 2002. Likewise, the Act makes it compulsory for senior managers of the corporations to be held directly liable for any fraudulent misrepresentation in the organization’s financial statements. The Sarbanes-Oxley Act of 2002 increases the penalty for auditing firms and corporations found violating any section of the 2002 Act. The 2002 law punishes any person (corporate officers or external auditing staff) found burning, hiding, or damaging records that will prove the financial statements are fraudulent.

Bernhard Kuschnik emphasized (2007) the law focuses on curtailing the fraudulent preparation of fraudulent financial statements. The law focuses on the prevention of companies listed in the stock exchanges from presenting intentionally misleading financial statements. The law includes the implementation of penalties on the officers of the corporations and the auditing firms found guilty of intentionally conniving to present false financial reports.

Guy Lander (2003) theorized the law was created in response to several accounting and corporate management scandals that tarnished the public’s impression of the fairness of the representations listed in the financial statements. Enron was able to victimize several current and prospective investors to funnel their cash and other assets into Enron. The unsuspecting investor victims trusted the external auditor’s report stating the financial statements of Enron were fairly presented. In reality, the Enron officers and the external auditor, Arthur Andersen, connived to hide a significant portion of the company’s liabilities from the financial statement users’ scrutinizing eyes. As a result, the investors relied on fraudulent financial statements to invest in Enron. After the discovery of the fraud and true financial performance, Enron filed for bankruptcy. In the same manner, Arthur Andersen closed shop because its name as an unbiased auditing firm had been tarnished by a handful of fraudulent auditing staff.

Likewise, Guy Lander (2003) stated they are no other companies that suffered the same fate as Enron. Tyco connived with its external auditors to present fraudulent financial statements. Another company, Worldcom, also connived with the external auditors to present false financial reports. Adelphia is another company that is brave enough to present false financial statements to entice hapless investors to put their money in the coffers of the company.

Based on the above discussion, the Sarbanes-Oxley Act of 2002 aims to reduce and prevent the falsification of financial statements. The law penalizes corporate officers and external auditors for conniving and conspiring to defraud the investors and other stakeholders by presenting false income statements and balance sheets. The accountings scandals tipped the balance towards creating and enforcing a more stringent law to punish the executive officers and the external auditing firm for conniving and conspiring to prepare false financial statements. The law creates an oversight board to monitor and punish erring corporate officers and auditing firms. Indeed, the adoption of the Sarbanes-Oxley Act of 2002 is an important law.

References

De_Vay, D. (2006). The Effectiveness of the Sarbanes-Oxey Act of 2002 in Preventing and Detecting Fraud in the Financial Statements. New York, University Press.

Kuschnik, B. (2007). The U.S. Sarbanes Oxley Act of 2002 Corporate Governance. New York, Grin Press.

Lander, G. (2003). What is Sarbanes-Oxley Act? New York, McGraw Hill Press.

Plette, T. (2008). The Sarbanes-Oxley Act of 2002. New York, Nova Press.

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IvyPanda. 2022. "Sarbanes-Oxley Act of 2002 Adoption as a Crucial Piece of Legislation." March 27, 2022. https://ivypanda.com/essays/sarbanes-oxley-act-of-2002-adoption-as-a-crucial-piece-of-legislation/.

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