Sarbanes Oxley Act - Part 2
Sarbanes Oxley Act was one of the most important steps towards ensuring transparency and corporate governance - Sarbanes Oxley Act introduction. It requires public limited companies to not only make their disclosure requirements more transparent but also require that public limited companies should set up independent audit committees to oversee the internal controls and reporting mechanism within the organization.
SOX was promulgated in 2002 in the aftermath of corporate scandals such as WorldCom and Enron and as a result of this it increased the role of audit committees, the membership criteria as well as committee composition. One of the most critical aspects of this law is the fact that it has necessitated that audit committees must be formed in such a combination that it includes independent directors. Since companies have on their board, both executive as well as non-executive directors therefore in order to ensure transparency even within the boards, SOX proposed that the audit committees must have independent non-executive directors too so that the supervisory role of boards shall also be improved.
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Though formation of Audit Committees was one of the requirements for listing on big stock exchanges however, this law has further strengthened the role of Audit Committees of the boards of directors and allowed them to be more objective while evaluating the roles and functions of external auditors along with taking up the role of facilitating such external audits.
SOX has also made the work of audit committees more challengeable by making them responsible for ensuring that the organizations must develop an environment which allow companies to come forward and highlight the issues which may have relevance for the audit. (Braiotta, Hickok, & Biegler, 2004).
The implementation of this law therefore has further strengthened the role of audit committees in ensuring that the organizations follow ethical principles of corporate governance and transparency.
1. Braiotta, L., Hickok, R. S., & Biegler, J. C. (2004). The audit committee handbook. New York: John Wiley and Sons.