Sarbanes-Oxley Act
...candal was that according to the prevalent accounting rules, SPEs were legitimate instruments .(Reinstein & Weirich 22). Another loophole in the accounting practice was the massive use of stock options, which does not have to be included in the financial statements as an expense, but can be treated as an expense by the firm for tax purpose. This allows firms to show lower to show lower payroll costs and higher figure profit figures. For example, Enron took a $625 million tax deduction for options from 1996 to 2000, yet legally included the $625 million on its earnings. (Kratz and Jones, 2002). Another accounting problem was the widespread amalgamation of the auditing and financial consulting functions. Arthur Anderson, Enron’s auditor was also its financial consultant and was paid millions of dollars in audit and consulting fees, which led to conflict of interest and impaired the auditor’s independence. The prompt passage of the Sarbanes-Oakley Act by the legislature was crucial in restoring the public’s confidence in corporate governance that, for a time, was badly shaken by the accounting and financial disclosure irregularities. A strong culture, positive or negative, will directly impact a control environment. Ignoring culture is like ignoring a cancer threat. Fairlure to take responsibility for the health of the corporate culture by way of periodic checkups and the constant exercise of values can lead to apathy and a diet deficient of reinforcing procedures. One of the provisions of Sarbanes-Oxley makes the chief executive officers (CEOs) and chief financial officers (CFOs) personally responsible for signing false accounts and financial statements. They can now get stiff jail terms for violating the law by signing false and misleading financial statements. Before Sarbanes-Oxley many CEOs and CFOs pleaded innocence when financial irregularities were revealed by claiming that they were unaware of the ‘cooking’ of the books by their subordinates. Despite the fact that hundreds of billions of dollars are lost every year to white collar crimes, white-collar criminals were always less likely to serve jail terms than other criminals. The Sarbanes-Oxley takes concrete measures to set the discrepancy right as the Title IX of the White Collar Crime Penalty Enhancement Act, which is part of the Sarbanes-Oxley Act provides for much larger jail terms for frauds. This is bound to have a psychological deterrence effect on incidences of white collar crime. (“Summary of…”) The Act also prohibits the auditors from providing other services such as financial consultancy to avoid conflict of interest. It also provides for auditors to be rotated periodically, in order to avoid them from getting too friendly with the management. Protection for ‘whistle blowers’ is another plus point of the Act: It would help to create a conducive corporate environment in which ethical employees would be encouraged to introduce an element of self-regulation in the work place. The Corporate Sector in the United States is already sufficiently regulated making it one of most tightly controlled in the world. Further regulation goes against the principles of a free market economy that is one of the basic principles of the country’s economy. What was needed in the wake of bankruptcy scandals was stricter enforcement of the existing laws rather than creating new ones. The Act was a knee-jerk reaction to the accounting scandals in a tiny percentage of businesses. The new reporting requirements of Sarbanes-Oxley, such as personal criminal liability for certifying the financial statements, would divert the attention of the top management and board of directors away from the basic purpose of businesses, i.e., to increase share-holder value to self-preservation. (Roberts) The new law would increase costs of doing business in an already precarious economy. The provisions of the Act would necessitate the creation of entire new departments that will contribute nothing to productivity, output, sales or cost reduction; thus reducing profits. The impact of increased costs is likely to hit the small businesses most severely. (Ibid.) The new legislation was supposed to help restore investor confidence and support the stock market. In reality, it is likely to do the opposite and may hurt the competitiveness of the US financial markets. For example the Sarbanes-Oxley Act prohibits companies from making loans to employees. This prohibition would discourage the foreign (particularly European) companies from enlisting in the US stock exchanges, since they routinely provide loans to their employees as a form of compensation. Several companies that would have enlisted on the American Stock Exchanges in the pre-Sarbanes days would think twice before doing so now. (Sheehan) Even before the Sarbanes Oxley Act was passed, the future of the accounting profession had been radically altered in the wake of the accounting scandals in Enron, WorldCom, Global Crossing and others. The credibility of the profession had suffered a major blow and it would take a long time for accountants to restore their image. The emphasis on the auditing function of the accounting profession in the Sarbanes-Oxley Act means that a long-standing trend is likely to be reversed. Over the last two decades, the accounting profession had de-emphasized the audit function in favor of accounting services such as financial consulting and management. The Act and the changed corporate environment mean that the audit function would become increasingly important in the 21st century. Previously only large publicly traded companies were required to comply with auditing and strict accounting standards. As a result of Sarbanes-Oxley even smaller private companies—especially those that deal regularly with the government, banks and insurance companies would be required to comply with the new rules. Some of the smaller, companies, that previously had little requirement for hiring the services of accountants and auditors would do so now. This means a much larger job market for qualified accountants in future. While the stricter...