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Research Paper Analysis of the Sarbanes

The Securities and Exchange Commission (SEC) administers the Act and deals with compliance, rules, and requirements. The Public Company Accounting Oversight Board (PCAOB) is in charge of overseeing regulating, inspecting, and disciplining accounting firms. Analysis on Five Provisions of the Sarbanes Oxley Act of 2002 The Sarbanes-Oxley Act of 2002, known as SOX, was introduced by Senator Paul Sarbanes and Representative Michael Oxley. SOX called one of the broadest sweeping legislation to improve public accounting in corporations since the securities acts of 1 933 and 1934.

The Sarbanes-Oxley Act, enacted January 2002 was due to umerous corporate scandals, including Arthur Anderson, Enron, Global Crossing, Tyco, and WorldCom. The Act meant to address financial practices and corporate governance due to widespread flaws in the way corporations reported their financial numbers for decades. One objective of the Act is to improve the truthfulness and dependability of corporate disclosures in order to protect investors. The Act created new standards for corporate responsibility as well as penalties for acts of wrongdoing; it also set a number of deadlines for compliance.

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The Sarbanes-Oxley Act of 2002 applies to both arge and small organizations and to U. S. public companies and international companies that have registered with the Securities and Exchange Commission. The Act consists of eleven titles with sections 302, 401 , 404, 409, 802 and 906 considered the most crucial in regards to compliance. When a company is in non-compliance, penalties can range from loss of exchange listing, multimillion-dollar fines, and imprisonment. Penalties given are based upon the section of the SOX the company did not comply with. SOXLaw. com, 2006) The Act developed a Public Company Accounting Oversight Board in rder to make sure financial statements were being audited according to independent standards. The Act holds chief financial officers and executives directly responsible for the accuracy Of financial statements, this rules out conflicts that would give securities analysts less than fair and gives board audit committees full control of auditors instead of Chief Executive Officers (CEO) or Chief Financial Officers (CFO).

The Enron scandal was a catalyst for the Sarbanes Oxley Act and one of the reasons why the new compliance standards for public accounting and auditing were needed. Enron, an American company that bought and sold gas, oil futures, built power plants and oil refineries, and was considered one of the biggest companies in the US. Enron was also thought to be a financially strong company in the US, however, Enron filed for bankruptcies in 2001. Prior to Enron filing bankruptcy, the government deregulated the oil and gas industry in order to allow more competition.

Companies, along with Enron took advantage of this deregulation. According to the article, “Enron, a Perceived Crisis in Public Confidence, and the Bipartisan Campaign Reform Act of 2002”, it is largely ue to the energy deregulation that Enron had grown to be the seventh ranking corporation among the Fortune 500. Enron, at the height of its business had over 21 ,OOO employees in forty countries around the world. (Cigler, A. J. , 2004). Enron revealed in October 2001 that the companys bookkeeping had been fraudulent.

All its recorded profits from previous years were wiped out by the losses and former unrecorded charges. Enron’s stock collapsed, and the company laid off much of its workforce, the employee’s 401 K pension fund, where employees typically invested in Enron stock was in fact, gone. (Cigler, A. J. , 2004). Enron misrepresented its earnings to the shareholders and employees, as well as embezzling money all while reporting fraudulent earnings to investors.

This was a shock to the American financial system; worse many employees lost their entire retirement portfolios. The company unable to obtain or arrange for credit for going operations declared chapter 11 bankruptcy on December 2, 2001. Title I of the Sarbanes-Oxley Act, created the Public Accounting Oversight Board (PCAOB). The PCAOB has the authority under the Act to create its own rules and audit standards. However, they do not become effective without approval from the Commission.

Rules that are approved must be consistent with the requirements of the Act and the securities laws necessary or appreciated in the publies interest or for the protections of investors. The board oversees public company audits and is responsible for developing national accounting standards. They have the responsibility of overseeing the accounting profession and public company audits by both the US and non-US accounting firms, as well as disciplining forms and independent accountants for violations of the SEC rules and regulations.

The Sarbanes-Oxley Act set limits n the types of non-audit services that accounting firms could provide to their clients in order to avoid any conflicts of interest. To achieve this, SOX identified nine problematic types of services it that prohibit accounting firms from providing. However, under the Act auditors can still perform many ancillary services if the relationship is approved by the corporations audit committee and must be disclosed to the public. (Lucci, J. , 2003). The Sarbanes-Oxley Act Section 302, under Title Ill, pertains to Corporate Responsibility for Financial Reports.

Statutory financial reports are to include he following certifications: 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 nvolved with internal activities, any significant changes in internal controls or related factors that could have a negative impact on the internal controls. (soxlaw. com/s302. htm) According to the article, “The Bankruptcy Heard Around the World,” a highly debated aspect of the Act is the requirement that CEO’s swear to the accuracy of their companies’ financial statements through a certification process.

Prior to the Act becoming, law, the SEC was using its rulemaking power to force CEO’s to validate the accuracy of the financial statements. The SOX continued and expanded this certification requirement. Under the Act, CEOs attest to the fact that their firms financial documents not only comply with the Securities Exchange Act of 1934. The SEC requires that CEOs take personal responsibility for their financial documents. Penalties for false certification are strong and were designed to deliver a powerful message to corporate executives. Though the Act implemented penalties for CEOs who certify false documents, it does not include sanctions for individuals who simply refuse to certify their documents.

It was discovered under the first round of certifications required under the Act that, CEO of Enron only certified reports iled only after the company filed for bankruptcy. (Lucci, J. , 2003). Tyco, a company that violated the Sarbanes-Oxley Act under Title Xl – Corporate Fraud and Accountability. In 1960, Tyco started as a research lab only to be transformed into a multinational through acquisitions. Dennis Kozlowski became president and Chief Operating Officer (COO) in 1 989 and promoted to CEO in 1992. He earned a nickname for hundreds of acquisitions he made. The earnings magic based on business combination accounting seemed to show significant growth and rising earnings. Tyco’s revenues rose in 1 997 to 001, almost 50 percent a year.

Tyco acquired ADT Security Services for $6 million; the acquisition structured as a reverse takeover allowing Tyco ADT’s Bermuda registration to shelter foreign earnings. The SEC investigated into Tyco’s acquisition accounting in 1999, but there was no systematic fraud problem and no charges were ever filed. It was not until Tyco acquired CIT Group for $9. 2 billion in 2001 when deceptive techniques used by Tyco became known. Tyco was excellent at “spring loading,” and notified the acquired company to enhance their accounting policies before the acquisition. They were to make several write-offs and adjustments, with the aim of improving the performance of Tyco directly after the acquisition.

CIT followed Tyco’s advice and disposed of $5 billion in poorly performing loans; they made downward adjustments of $221. 6 million and increased the credit- loss provisions, as well as other false adjustments. CIT revenues lowered just before the sale and increased significantly after the deal. The result was a net loss reported by CIT just before the acquisition date. CIT reported a net income of $71. 2 million after the acquisition. This increased Tyco’s earnings. CIT’s new name, Tyco Capital had massive credit problems now that it was tied to Tyco. Eventually, the new business sold and Tyco recorded it as discontinued operation, among other losses, with a total net loss of $9. 4 billion.

The president and CFO were charged with 38 felonies that included enterprise corruption and grand larceny. (Giroux, G. , 2008) Tyco also violated Title IV, Enhanced Financial Disclosures under SOX; it requires corporate officers’ to disclose stock transactions. Title IV has nine sections that enhanced reporting requirements for financial transactions. under Section 03, management and principal stockholders must disclose any securities transactions. Tyco’s president, CFO, and general counsel failed to comply with this rule. This had made executive loans a sore spot with investors after their potential dangers had become clear from alleged abuses at Tyco and WorldCom. (Matt, K. , n. d).


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