Why The Sarbanes-Oxley Act Should Not Be Repealed.

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Why the Sarbanes-Oxley Act should not be repealed.

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Introduction of Sarbanes Oxley

On March 5th, 2001, Fortune magazine released an article by Bethany McLean. The theme of this article was that Enron's stocks were overpriced. She stated that Enron's stocks were really popular and that its numbers were really impressive. Its revenues had doubled to over $100 billion, earnings were increasing by 25% and stocks were returning over 89%. All this seemed a little too much like a fairy tale. She raised questions like 'Where does Enron get its revenues from?', 'Why it was so complicated to get information from Enron?' and so on. When asked these questions, various Enron executives had different answers; most popular of them was "We do not want to let people know where we make money from."

We all know what happened to Enron in October of the same year. Many such scandals broke out during the period of 2000-2002, WorldCom, Tyco International, Adelphia, Peregrine Systems were a few to name. These scandals resulted in many investors losing their money, some who had invested their life savings, due to stock price crashes also causing instability in the stock markets. After a series of analysis and discussions, the senate passed a bill call 'Sarbanes Oxley Act of 2002'.

What areas did the 'Sarbanes Oxley Act' cover?

The Sarbanes-Oxley Act contains specific mandates and requirements for financial reporting. Like other regulatory requirements, some sections of the act are more pertinent to compliance than others. The following are the key Sarbanes-Oxley sections: Section 302, Section 401, Section 404, Section 409 and Section 802.

1. Section 302:

This section is listed under Title III of the act, and pertains to 'Corporate Responsibility for Financial Reports'. Periodic statutory financial reports are to include certifications that:

*..The..signing..officers..have..reviewed..the..report.

* The report does not contain any material untrue statements or material omission..or..be..considered..misleading.

* The financial statements and related information fairly present the financial condition..and..the..results..in..all..material..respects

* The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their..findings.

* A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities

* Any significant changes in internal controls or related factors that could have a negative impact on the internal controls.

2. Section 401:

This section is listed under Title IV of the act (Enhanced Financial Disclosures), and pertains to 'Disclosures in Periodic Reports'.

According to this section:

Financial statements are published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information. These financial statements shall also include all material off-balance sheet liabilities, obligations or transactions. The Commission was required to study and report on the extent of off-balance transactions resulting transparent reporting. The Commission is also required to determine whether generally accepted accounting principles or other regulations result in open and meaningful reporting by issuers.

3. Section 404:

This section is listed under Title IV of the act (Enhanced Financial Disclosures), and pertains to 'Management Assessment of Internal Controls'.

According to this section:

Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures.

The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.

4. Section 409:

This section is listed within Title IV of the act (Enhanced Financial Disclosures), and pertains to 'Real Time Issuer Disclosures'.

According to this section:

Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in terms that are easy to understand supported by trend and qualitative information of graphic presentations as appropriate.

5. Section 502:

This section is listed within Title VIII of the act (Corporate and Criminal Fraud Accountability), and pertains to 'Criminal Penalties for Altering Documents'.

According..to..this..section:

This section imposes penalties of fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation. This section also imposes penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly and wilfully violates the requirements of maintenance of all audit or review papers for a period of 5 years.

Does its benefits overcome the costs?

Lord & Benoit, LLC a SOX Research and Compliance firm has conducted preliminary research comparing average relative share price movements between companies with material weaknesses in their internal controls over financial reporting as opposed to companies without material weaknesses in their internal controls over financial reporting. The data was compiled using www.AuditAnalytics.com, a leading provider of audit and internal control related due diligence information for public