Analysis of IT Issues in the Sarbanes-Oxley Act of 2002 Essay
In 2002, the 107th Congress of the United States of America passed the Sarbanes-Oxley Act of 2002 which emphasizes the integration of Information Technology (IT) practices among corporate entities in an effort to address the changing demographics of doing business in the country. Also, the act is aimed at giving protection to corporate investors, specifically buyers of company stocks through the establishment of new corporate standards which would provide transparency in corporate deals as well as corporate disclosures that companies engage in.
The act also highlights the existence of corporate responsibilities of companies that are gauged towards the clear and assessment and auditing of financial records of companies operating in the United States. The act is also known in corporate America as the Public Company Accounting Reform and Investor Protection Act of 2002. This was sponsored in the United States House of Senate by Senator Paul Serbanes of Maryland and Representative Michael Oxley of Ohio in the House of Representatives.
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The act was the government response to the emergence of various corporate scandals in previous years among American companies which involve a lot of accounting mismanagement (United States. Congress. Senate. Committee on Banking Housing and Urban Affairs. ). Such situations led to the bankruptcy and fraud of the company and left investors in the dark. For instance, the bankruptcy of huge energy company Enron as well as telecommunications giant WorldCom, among others highlighted the urgency to legislate such act.
This act urged the stakeholders from both the corporate arena as well as the government side to act towards the protection of vital investments made to the American companies. For the corporate side, additional company board responsibilities regarding accounting procedures were enacted upon and were emphasized as a priority especially in the making of company reports (Welytok). For instance, Section 404 of this act states the liability of the companies’ board to have and gain management control over the annual internal financial reports that the respective company would have.
This also entailed the implementation of a longer jail sentence for non-compliance by 2004 which will be monitored by the United States Securities and Exchange Commission in behalf of the United States Government. Compliance Requirements According to Section 404 of the Sarbanes-Oxley Act, companies are required to have a stable and efficient working framework of company accounting principles which are geared towards the integration of the company’s IT systems and accounting frameworks (United States. Congress. House. Committee on Financial Services. ). Through the act, the presence of a company auditor which is legislated to be independent from the company board is also instructed to make a report on the company’s assessment of the effectiveness of the certain corporate entity to report financial assessments. This gives a certain corporate entity in the United States to have financial entities that are able to independently monitor corporate operations through approved and SOX-compliant accounting practices.
Furthermore, the American companies, both small and large ones are then compelled to exert efforts in the production of such reports. Failure to do so may entail to the non-compliance to the act and may imply corporate dishonesty thus leading to government sanctions. Issues on the Provisions of Section 404 The act was a promising solution to the emergence of rampant corporate dishonesty in the American corporate accounting procedures. However, there are also some provisions that are not considerate in terms of the scope of implementations.
For instance, the act protects the welfare of the investors but does not protect small corporate players who may not be able to fully comply to the act. The act discreetly implies that in order to be SOX compliant, and as stated particularly in Section 404, the corporate entity has to have an IT system like COBIT that would help the United States Government to effectively monitor accounting procedures (Lahti and Peterson). This particular IT system is really expensive to develop, acquire, and maintain.
A small business entity may not be able to effectively afford and adapt to such system that is SOX-compliant. Even if the company is able to do so, it could spell disaster or corporate suicide in bold letters. Additionally, section 404 of the same act also requires the presence of independent auditors who will then have the task of producing the company financial reports using accounting procedures that are SOX compliant (Miller). A large American company would have no difficulty in adjusting to such provision.
However, a small company then again may not be able to afford having an independent auditor for this entails additional operating costs as well as additional internal costs in the form of professional auditing fees. The emergence of the Third-party fees is not included in such costs and in general, such additional costs would affect small business proxy materials significantly and in the long run decrease profitability. On the other hand, the increase of efficiency rates in the long run remains a promising compensation to rising costs of adaptation to the act.
Upon implementation of the provisions of the SOX Section 404, the company would then be able to gain increased efficiency rates as an effect of the learning curve principle in terms of controlling as well as implementation issues that are geared towards the creation of better corporate practices. The main argument however remains that even before small businesses are able to meet such efficiency rates and become SOX-compliant, would they still be afloat? The answer still is uncertain.