As of 2002, the Sarbanes-Oxley Act has been enforcing a federal law that motioned public firms to comply with sweeping audits, financial regulations, and other mandatory functions. The act facilitates the protection of shareholders, employees, and the public from a manner of hazards, including fraudulent practices in finance, accounting mistakes, and even potentially large scandals (Berk et al., 2018). Certain specific requirements of the act are especially effective in allowing for improved financial activity among public firms that focus on integrity.
The most effective requirement of the Sarbanes-Oxley Act is the outlines that ensure the independence of auditors. Within public company settings, auditors can be seen as gatekeepers for the investors of the firms (Saint Joseph’s University, n.d.). The integrity and quality of a market can depend on the auditors active within and their ability and options to remain independent. It was only after the implementation of the Sarbanes-Oxley Act that public firms were made to address the conflicts of interest that related issues throughout the process of hiring an auditor. Audit committees currently possess the power to observe the management of auditors who are hired. Current Sarbanes-Oxley Act guidelines even make it mandatory for engagement partners of auditors to be rotated every five years in order to reduce the chances of an alliance with a managerial team.
Without the interference of the Sarbanes-Oxley Act, there could be no assurance that an auditor may interact with the financial statements of public firms without personal interests. The provided information is confidential and susceptible to being misused in the case that a party may acquire it. As such, the independent nature of an auditor and a lack of personal gain is fundamental to effective company functions in the public sphere.
References
Berk, J., DeMarzo, P., & Harford, J. (2018). Fundamental of Corporate Finance. Pearson.
Saint Joseph University. (n.d.). 5 Key Takeaways After 20 Years of Sarbanes-Oxley. Saint Joseph University. Web.