Sarbanes Oxley

Abstract

The members of Team C are consultants for publicly traded company that needs to familiarize itself with the ins and outs of Sarbanes-Oxley. The major provisions of Sarbanes-Oxley are explained, as are arguments concerning the pros and cons of Sarbanes-Oxley. Following the pros and cons arguments, an assessment of the impacts of Sarbanes-Oxley is provided. The last discussion included is the ethical considerations of Sarbanes-Oxley with examples of potential unethical behavior.

Major Provisions of Sarbanes-Oxley

On January 22, 2003, the SEC adopted the provisions of section 401(a) of the Sarbanes-Oxley act that President Bush signed into law the previous July. On the website www.sarbanesoxley.com, accountants or anyone who pays for the service, can type the stock symbol for a public company and obtain audit information including revenues, asset, controls, as well as a company's clients and year-to-year changes in the company's financial information. "Auditing, Risk Management and a Post Sarbanes-Oxley World" discusses the major provisions of the Sarbanes-Oxley Act (Linsley, 2003). According to Linsley, these provisions are as follows:

Ð'* Creation of a Public Company Accounting Board (PCAOB), whose members are to be appointed by the SEC (section 101)

Ð'* The prohibition of non-audit services contemporaneously with and audit (section 201)

Ð'* The lead auditor and the reviewing partner may serve at most five years on any audit (section 203)

Ð'* The auditors will now report to the audit committee (AC), not to management (section 204)

Ð'* AC members must be independent directors, which basically means they must not be in receipt of money from the firm for any service other than being a director (section 301)

Ð'* The AC will be responsible for the appointment and oversight of the auditors (section 301)

Ð'* The CEO and CFO of each public firm will explicitly be required to state that the financial statements and disclosures are a fair presentation of the firm's operations and financial position (section 302)

Ð'* The CEO and CFO will have to reimburse their firm for bonuses that were based on statements that were required to be restated due to material noncompliance with reporting standards (section 304)

Ð'* Prohibition on trading in stock by officers and directors during pension blackout periods (section 306)

Ð'* Disclosure of all material off-balance sheet transactions, arrangements and obligations. Also, these must be explained separately in the "management's discussion and analysis (section 401(a))

Ð'* Each annual report must contain a report on internal controls, to include a statement of management responsibility for, and an assessment of the effectiveness of these controls.

Eleven major provisions of Sarbanes-Oxley provide a publicly held company with significant insight into the importance of Sarbanes-Oxley law. Businesses are accountable for avoiding the major problems that have historically led to debacles such as Enron and WorldCom. "The Sarbanes-Oxley solution is to place legal restraints on certain behaviors, to make responsibilities more explicit, and to require certain information to be made public" (Linsley, 2003). Much of the burden of Sarbanes-Oxley falls to the external and internal auditors as well as all accountants involved in with the financial data of a company.

Pros and Cons of Sarbanes-Oxley

Sarbanes-Oxley law was a response to America's Enron and similar scandals but the high cost of enforcement, time consumption related to enforcement of these laws and difficulty to make managers and accountants more accountable for their actions is a headache-causing process. In May 2005, Alan Greenspan, chairman of the Federal Reserve noted that "the law will be fine-tuned as experience accumulates" (Sarbanes-Oxley Special Report, 2005). Perhaps the law is difficult to enforce but time and experience will make things easier. A paper written by Ivy Xiying Zhang from the University of Rochesters puts the net private cost of Sarbanes-Oxley law at $1.4 trillion. Zhang's estimate is based on "the loss in total market value around the most significant legislative events-ie, the costs minus the benefits as perceived by the stock market as the new rules were enacted" (Sarbanes-Oxley Special Report, 2005). One survey found that companies paid an average of $2.4 million more during 2004 audits that the companies had anticipated. Smaller companies have more difficulties following all of the section of the law and thus regulators gave extensions for 2005 report filing. A study by Foley & Lardner, a law firm, concluded that as many as 20% of companies are considering becoming private companies to avoid the expensive costs of Sarbanes-Oxley (Sarbanes-Oxley Special Report, 2005).

On the flipside, the pros of Sarbanes-Oxley are that financial fraud in America should be reduced over time. Other benefits of Sarbanes-Oxley that are being realized over time are that Sarbanes-Oxley efforts are allowing corporations to manage risk more effectively, automating processes allow new opportunities for improvements. Companies can save time by automation that are less time consuming than previously used manual control processes. Overall, organizational performance is boosted when Sarbanes-Oxley is applied to compliance and control improvements. "Good governance and tight regulatory controls are rewarded with a stock-price premium" (Gill, 2005).

Impacts of Sarbanes-Oxley

The Sarbanes-Oxley statute has made a significant impact in the accounting profession and in both large and small corporations. Many companies required additional hours to comply with the new law. This caused a surge in the demand for accountants and auditors, which ultimately caused a shortage of experienced professionals. This consequence of the law was unexpected and somewhat ironic considering the statute arose from accounting scandals that inspired the law.

In order to offset the significantly increased auditing costs, a large number of company's switched to smaller auditing firms. AuditAnalytics.com, which is an online research company, estimated that big auditing firms lost more clients than they gained