The Impact of Sarbanes-Oxley Act of 2002 on Accounting and Finance Departments

Danika Grace Brown

Lakeland College Kellett School of Business BlendEdBA 772 Advanced Industrial Accounting II

Instructor Mary DiederichMarch 10, 2015

Table of ContentsAbstract2Overview of the Sarbanes-Oxley Act of 20023About SOX4Reporting and Compliance5Risk Assessment and Control6Interview at Company X7Standards for Corporations and Officers8Auditing and Financial Reporting9Future Impact of SOX10Conclusion11References13

Abstract

Sarbanes-Oxley is the response from Congress in regards to the financial industry collapse that happened over a decade ago. Due to unethical reporting from corporations, Sarbanes-Oxley (SOX) is a United States federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. As a result of SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Furthermore, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements. This paper will look to provide an oversight of the law and how it pertains to the standards in Accounting and Finance departments nowadays. In addition, this paper will also touch on the ongoing costs and benefits of the now standard regulations. An interview with the Accounting and Finance managers will cover the provisions that employers have had to put into place to comply with those regulations.

Overview of the Sarbanes-Oxley Act of 2002

The devastating collapse of prestigious United States financial institutions in 2001 has ushered in a paradigm shift in financial accountability; and highlighted the overall ethical consequences of failure to comply with the governing rule of law. As a response to this collapse, Congress passed the Sarbanes-Oxley Act (SOX) in July 2002 to enhance corporate governance in an attempt to restore public confidence in the banking system. The Sarbanes-Oxley Act has introduced significant changes in management's reporting responsibilities and the scope and nature of the responsibilities of auditors. President Bush characterized the Act as the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt. (SEC 2006). The establishment of the Public Company Accounting Oversight Board (PCAOB) is one of the most important provisions of the Sarbanes-Oxley Act. This establishment prohibits the execution of certain non-audit services by auditors for their audit clients by imposing greater criminal penalties for corporate fraud. The PCAOB also demands more detail and timely disclosure of any financial information. About SOX

Within the Act, there are two separate CEO/CFO certification requirements; the first contained in Section 302 and the second in Section 906 of the Act. Furthermore, it also contains prohibition on loans and credit to directors and executives, and is very strong on ethical codes for senior management. In the Act, there are sections that cover forfeiture by the CEO and the CFO of certain bonuses and profits, prohibition of improper influence on audits, trading restrictions, and prohibition of service as a director or officer of a public company if he or she has violated the general anti-fraud provisions of the securities laws. (Carver, B.T. 2003). The main objective of Congress in passing the Sarbanes-Oxley Act was to ensure that financial executives and their organizations were preparing financial statements and recording transactions in an accurate, fair, and ethical manner. Several requirements are needed to achieve the above objectives; however, one of the most important factors is proper education and interpretation of the Act by auditors, presidents, and financial officers. The Act has greatly challenged and impacted the future of accounting and finance education in corporate America. Because of this, companies have been challenged to embrace the changing landscape of finance education, and to create new strategies to deal with current events and new regulations within the accounting and finance world.

In a 2002 report, Albrecht and Sack predicted that financial corporations face a perilous future, and that definitive action in need to ensure that accounting education maintains its relevance now and in the future. (Albrecht and Sack 2002). The Sarbanes-Oxley Act of 2002 is therefore, one of the most far-reaching pieces of legislation that has ever been enacted, which has the potential to revolutionize the entire financial landscape. How is the Act continuing to impact the accounting and finance industries over a decade after being passed? How are the ethical standards changing to handle the changing financial winds that are constantly shifting the ideological and procedural sands of time? Though the Sarbanes-Oxley Act has challenged the most brilliant financial minds of our times; it should also be noted that institutions, organizations, and corporations are only what they have been becoming. Therefore, accounting and finance educators are faced with an even greater challenge to reach back in time to obtain understanding of where things went wrong. The Report of the Commission on Fraudulent Financial Reporting (The Treadway Commission Report) recommended in October of 1987: that For the top management of a public company to discharge its obligations to oversee the financial reporting process, it must identify, understand, and assess the factors that may cause the financial statements to be fraudulently misstated (Leech 2003). As a result of the Treadway Commission Report, the Securities and Exchange Commission (SEC) introduced a number of checks and balances in 1988 to address internal controls in corporations (Leech 2003). These checks and balances i.e. rules ultimately led to the creation of the Sarbanes-Oxley Act of 2002. Reporting and Compliance

Therefore, in addressing these challenges, accounting and finance departments have spent valuable time studying various internal controls, which are certifications, issued by management pursuant to the Sarbanes-Oxley Act sections 302 and 404. Through this process, accounting firms and educational institutions can benefit from voluntary compliance with sections 302 and 404 of the Sarbanes-Oxley Act by improving their competitive position with rating agencies, donors, lenders, and government lending agencies. Complying with the Sarbanes-Oxley Act can also strengthen board governance, and reinforce administrative practices, which would ultimately enhance a university's reputation. (SOX 2002). Financial reporting and compliance to the Sarbanes-Oxley Act are not without risks, however, as will be explained; the impact of Sarbanes-Oxley Act on accounting and finance education, create greater control, better governance, and a transparent atmosphere for financial accountability. With identifying and describing the impact that Sarbanes-Oxley Act of 2002 has on Accounting & Finance industries, which is the objective of this paper, one should also be cognizant of the fact that corporate America has already gone through a handful of rounds of SOX readiness and testing, which had both positive and negative effects on accounting and finance reporting. On the positive side, companies big and small now benefit from the lessons learned from companies, such as Enron, HealthSouth, and WorldCom. Lessons that have lead Congress to develop better control practices. The Sarbanes-Oxley Act is therefore, the master control variable for the ideological, and procedural interpretation of ethical financial responsibility.Risk Assessment and Control

Department heads should also stress the provisions available for employees of corporations who provide evidence of fraud, or those who temper with records or seek to impede official proceeding. No one should ignore the ethical consequences that improper influence on conduct of audits, and criminal penalties for altering documents have on the future of accounting in corporate America. However, the concept and practice of issuing public certification about the design and the effectiveness of controls can be incredibly disastrous if the process is not followed and executed with accuracy. In order to mitigate these risks, both individuals and companies must therefore assume a deliberate and proven approach on the dissemination of information and strategies about control assessment and documentation. By following this approach, it will have a positive impact on the accounting and finance industries and will help both governments and corporations create a framework for the evaluation of overall financial risk, and not just the presentation of accountability concepts that stem from structures and circumstances that differ fundamentally from the stewardship responsibilities and the public obligations that they face.

The above mentioned framework can help institutions monitor interpretation of the Sarbanes-Oxley Act while gathering feedback from managers, administrators, trustees, performance improvement bodies, and government officials, which can further help accounting and finance departments regarding accountability and governance issues that impact the business processes. This approach can set in motion the necessary processes that drives actuate financial reporting and compliance management. (Turner, L. E. 2006). Accounting and financial education institutions play a vital role in pre-identifying business tasks and processes that are directly related to financial reporting and compliance risks, and therefore form one of the first channels for the interpretation for the Sarbanes-Oxley Act. The Act is not designed to rid businesses of corruption. It does not punish anyone for embezzling, wasting corporate assets, excessive compensation, or anything else. Those rules, and punishments, lie elsewhere. Instead, its goal is to encourage the earlier discovery and disclosure of corruption. Its method is to require businesses to have enough incentives and mechanisms in place to persuade persons who are generally lower in the organizational chart to disclose problems (and possible wrongdoing) to someone with greater authority. Both accounting and financial institutions therefore have a greater responsibility in ensuring that correct information and interpretation of the Sarbanes-Oxley Act be made available to companies and organizations. Interview at Company X

Lia Yang, the Accounting Manager at Company X revealed that she is still pleased with the decision of Congress to enact SOX. Having a strict set of guidelines that every individual and company in the financial industry must comply with, will only strengthen the trust and the economy for the future. (Yang, 2015) According to Ian Eisenberg, the Finance Director, I feel that the continued benefits of SOX will outlive any negative media that may still be associated with the law. They both mention that SOX can be very relatable and carries some form of continuity between companies. For the financial statement reporting, they both acknowledge that it is beneficial for inventors to honestly know how a company is doing and having the company be required to disclose everything. Having transparency is something that investors will no longer be worried about companies lacking. (Eisenberg, 2015). In addition to this, Ian Eisenberg also pointed out that other countries have passed similar legislation demanding greater accountability of publicly held corporations. Furthermore, there has been a significant impact that the Act has had on other nations in terms of demanding accountability from corporations and fostering a greater transparency in corporate culture.Standards for Corporations and Officers

The process of accountability begins with the one who is responsible for vouching for the accuracy of the financial reports, but it does not stop there. The Sarbanes-Oxley Act imposes obligations on individuals: the first is the principal executive officer or offices and the principal financial officer or offices or persons who function within that capacity. (SEC 2006). Both the president and the CFO must provide written certifications confirming the completeness and accuracy of the reports that they are authenticating. If the certifications are later determined to be deficient or incorrect, the Act requires that both officers to restore to the corporation any bonuses or equity that they received, and all profits made on any of the companys stock that they sold, within the twelve months prior to the date of the certification. (SEC 2006). In addition, the certification places emphasis on the following requirements: The officer must review the report; the report must contain no untrue statements or neglect to include any fact that would make the report misleading. The report must also present the two financial condition and operations of the corporation, the officers must have implemented the internal controls that they believe were necessary to ensure that all material information regarding the financial state of the corporation has been provided to them, and have disclosed in the report any significant changes since the date of the last report. (Zhang, I. X. 2007). Therefore, it is clear that the battleground where the current financial system can be revolutionized is in the informed mind. Whether the information will produce a favorable or unfavorable change is to a certain extent dependent upon the individuals who interprets the law. The Sarbanes-Oxley Act has inspired many institutions to conduct research to find out how accounting and finance education can address the challenges presented by the Act. Much research has been conducted to ascertain how institutions, if ever, are incorporating the Sarbanes-Oxley Act within their curriculum. (Johnson 2005). Data gathered by Johnson from research of 61 institutions suggests that financial reporting and governmental accounting are not receiving sufficient coverage at the classroom level. This revelation suggests that, though the Sarbanes-Oxley Act has impacted the financial sector of the United States, many are still unaware of its provisions, and many are still uninformed about the significance of the Act. (Johnson 2005). Auditing and Financial Reporting

As noted before, the Sarbanes-Oxley Act has stipulated a measure of independence, where auditors are concerned, for the purpose of credibility. In a similar fashion, accounting and finance professionals are entrusted with the task of providing clear and accurate information in the financial statements. This is necessary and beneficial because it is based on the stipulations set forth by the law in the Sarbanes-Oxley Act section 201, which forbids accounting firms from providing non-audit services contemporaneously with the audits of registered clients. (Messier, et al 2006). Under the Sarbanes-Oxley Act, a public company's audit committee is entrusted with the task of overseeing the internal and external audits and must evaluate review and approve all audits and non-audit services provided by a company's auditor under Section 202 of the Act. In order to protect the integrity of records, Section 203 of the Act requires rotation of lead audit personnel every five years. (Messier et al 2006). Auditors are also obligated to provide special reports. The process is a complex one, and therefore requires commitment, and consistency on the part of the auditors. This level of purpose must also be carried into the classroom in order to gain a complete and a working knowledge of the various aspects of the Act, and how it is applied in a variety of circumstances. One of the greatest challenges that has been presented by Sarbanes-Oxley pertains to ethical responsibilities and subsequent consequences for those who deviate from the established protocols of financial accountability. In this regard, accounting and financial reporting stands as one of the greatest signs of the crossroads of corporate America. This crossroad has been the final battleground that continues to product the greatest challenge for both accounting and financial institutions. Future Impact of SOX

As a control standard, no one could fault the Acts approach because through certification it seeks the answers to basic questions from the corporations financial officers or president who represent the competency of the company. The Act requires that each member of the companys audit committee be a member of the board of directors and be independent. This independence guarantees audit committees separation from the management team, and also ensures that there's no compensation, either directly or indirectly from the company as a consultant for the professional services rendered. The Sarbanes-Oxley Act further challenges individuals to incorporate the legislative changes that it presents into their corporations to a create controls, and study the business environment on a regular basis. This fact presents yet another challenge to corporate America to constantly monitor revisions, and to be cognizant of the fact that because of these revisions, the implications of the Act will constantly change, therefore the strategies employed to interpret these revisions must change from time to time. It should be noted in terms of regulations; that the Act stresses the right of everyone to work in a professional and supportive environment. It also stresses the rights to exercise judgment, and perform duties without disruption or harassment, with freedom of conscience and the right to refuse to engage in actions that violate the ethical principles contained in the Act. The impact of the Sarbanes-Oxley Act on accounting and finance education becomes more complex when one considers the fact that controls are not always a rationale; in other words, not all controls are created equal. Also, technologies such as computers and smart software programs should be leveraged to enhance the efficiency and effectiveness of the teaching process.Conclusion

As the accounting and finance professions in the United States and worldwide become more complex, so does the problems and challenges. In order to help rectify some of these problems, Congress passed the Sarbanes-Oxley Act of 2002 which highlighted the need for a change within the accounting and finance industries. The Act presents a roadmap for change, with many crossroads, and new challenges, but without promise. The Act in itself has proven to be not an Act, but rather a dynamic process that is presenting a model for change. It addresses change at every level within the corporation; from background checks, to the annual disclosure of conflicts of interest, to codes of conduct for employees and trustees that includes sanctions for noncompliance. Furthermore, the Act continues to challenge the systems to create credible control systems to investigate and respond to allegations of improper conduct. The Act also contains a written whistleblower policy and procedures that provides confidentiality, and protection from retaliation. The impact of Sarbanes-Oxley of 2002 on the accounting and finance industries in the United States in an ongoing process; therefore, the impact itself cannot be thought of as definite; it is a changing variable that is not always rational. However it should be noted that the objective of the Act remains the same, which include auditing and related attestation, quality-control, ethics, independence, and standards necessary for the protection of investors (SOX 2002). The Sarbanes-Oxley Act will no doubt continue to undergo changes and revisions over time; however, its importance in today's business environment should not be undermined.

References

Abbott, L., Parker, S., & Peters, G. (2004). Audit Committee Characteristics and Restatements. Journal of Practice and Theory, 23, 69-87, 19. Retrieved 02/20/2015, from http://web.ebscohost.com.ezproxy.oru.edu:2048/ehost/detai/loginArens, A. A., & Elder, R. J. (2006, November 2006). Perspectives on Auditing Education after Sarbanes-Oxley. Issues in Accounting Education, 21, 4, 342-362, 18. Retrieved 02/20/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=23038966&site=ehost-liveBeggs, J., & Dean, K. (2007, March 2007). Legislated Ethics or Ethics Education?: Faculty Views in the Post-Enron Era. Journal of Business Ethics, 71, 15-37, 23. Retrieved 02/21/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=23922956&site=ehost-liveCarver, B. T. (2003, Aug./Sep. 2003). The Sarbanes-Oxley Act: Weighing the Opportunities and Consequences for Tennessee CPAs. Tennessee CPA Journal, 30-33.Delikat, M. (2007, 8/23/2007). Blowing the Wistle on Sarbox. Wall Street Journal - Eastern Edition, 250, 45, pA10, 00. Retrieved 02/22/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26391182&site=ehost-liveHassab, E., Said, A., & Wolfe, G. (September, 2007). Audit Committees Oversight Responsibilities Post Sarbanes-Oxley Act. American Journal of Business, 22, 19-32, 14. Retrieved 02/20/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26683475&site=ehost-liveJohnson, G. F. (2005, August). The Sarbanes-Oxley Act and Undergraduate Course: A Study of Current Practice. The CPA Journal, 75.8 Leech, T. J. (2003, April). Sarbanes-Oxley Sections 302 and 404. A White Paper Proposing Practical, Cost Effective Compliance StrategiesMessier, W. F., Glover, S. M., & Prawitt, D. F. (2006). Auditing and Assurance Services: A Systematic Approach (3 ed.). New York, NY: McGraw Hill.O'Sullivan, K. (2007, August 2007). The SEC Rules. Retrieved 02/23/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26344120&site=ehost-liveSarbanes-Oxley Act of 2002 (SOX) (2002). . , Publ. L. 107-204, 116 Stat. 745, sec. 1-1107Schott Karr, S. (2004, June 2004). Accounting School Gets An Ethics Makeover. Financial Executive, 20, 4, 28-30, 3, 1. Retrieved 02/22/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=13324375&site=ehost-liveTurner, L. E. (2006, November 2006). Learning from Accounting History: Will We Get It Right This Time? Issues in Accounting Education, 21, 4, 383-407, 25. Retrieved 02/20/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=23038968&site=ehost-liveU.S. Securities and Exchange Commission (2006, 10 April 2006). The Investors Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. Retrieved 02/24/2015, from http://www.sec.gov/about/whatwedo.shtmlZhang, I. X. (2007, September 2007). Economic consequences of the SarbanesOxley Act of 2002. Journal of Accounting & Economics, 44, 74-115, 42. Retrieved 02/23/2015, from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25934842&site=ehost-live