In 2002, the Sarbanes Oxley act was passed. This act is a federal law established to protect shareholders, employees, and the company from fraudulent financial practices and accounting errors. They did this by setting auditing and financial regulations for public companies. Numerous corporate scandals were occurring across the US, and investors needed to feel more confident in the financial market. Ever since this Act was passed, the way corporate governance is handled has been improved, and this article will serve to go more in-depth on the way corporate governance has benefited from Sarbanes Oxley.
What does this law focus on?
- Makes senior executives more responsible for improving the quality of the company’s financial disclosure reports.
- Holds directors and officers liable for financial statement accuracy.
- Establishes stricter penalties for securities fraud.
- Limits the services auditors can offer to a publicly-traded client.
- Requires that publicly traded companies implement and test internal controls over financial reporting, and document deviations.
- Makes auditing committees more independent from the company they work for
Having good governance is a mix of both the tangible and the intangible. Strong governance gives structure and discipline, along with training employees to follow proper procedures and instilling ethical values. Executives should also lead by example, prompting the rest of the organization to follow suit and emulate their behavior. These are components of the control environment, which forms the base for strong internal control. Having a good control environment is a factor used by external auditors when called to evaluate internal controls over financial reporting. A company that shows a robust control environment can reduce its scope of internal-control evaluation meaning a reduction in the amount of internal testing done, and less corroborating with the auditor, reducing compliance cost.
Documentation has improved due to Sarbanes-Oxley. Many hours are spent updating operation manuals, revising policies, and recording control processes. Section 302 and 404 require CFOs and CEOs to authenticate the effectiveness of internal control over financial reporting. This makes it easier to decipher who is responsible for which business process. The benefit of this becomes more apparent during employee absences and high turnover periods. Being able to know who is accountable for different methods is a critical component of an internal-control program and accelerates oversight, training, and performance evaluation.
Sarbanes-Oxley has created a more efficient way of financial reporting. With the primary goal of the act being to make financial reporting more transparent, minimum standards for determining reliable information were established. First, a high-level financial reporting objective and sub-objectives related to the preparation of financial statements and disclosures are specified. After each exposure or account, management identifies relevant financial reporting assertions. Also, management must identify underlying transactions, events, and processes supporting that account or disclosure. Completing this process, although tedious, creates a more efficient and reliable financial report. Once the mapping of the control environment is achieved, and compliance requirements are met and positioned, it makes it easier to track material changes in future years, making reporting easier as the organization grows. This accuracy in reporting means a reduction in time spent to correct mistakes.
Overall, the Sarbanes-Oxley Act of 2002 has improved procedures and held employees accountable for different processes as well as created a more efficient and reliable method of financial reporting and documenting. This all leads to saving time and money as well as keeping the trust of shareholders and the company name clean from scandals dealing with fraudulent financial practices.