This article presents certain explanations about the Sarbanes-Oxley Act of 2002 seven years after its enactment by the United States of America.
For the reason of the recent economic conducts of some person (business man or accountant) or company (like the Enron or WorldCom), the United States of America realised the necessity to bring into force a new federal legislation: the Sarbanes-Oxley Act, supervised by the Public Company Accounting Oversight Board. This act prohibits many transactions; including the sale of stock when there is a blackout period or loans from the company to the executives. The Sarbanes-Oxley Act has the same end objective as the Securities and Exchange Commission (SEC) which was established a few years earlier. This being said, having the public support is a sine qua non condition for the Sarbanes-Oxley Act to be effective, and then the Congress will act upon it.
Even if the Enron’s consequences upon investors remain very large, (we are talking about billions of dollars), and a reform of governance was inevitable, the reform post Enron stalled in the Congress. Nevertheless, a strong lobbying was made to continue the post Enron reform. Several politicians had mentioned that intervening would create a lack of confidence on investors, contrary to the principle of free market. Then again, those exact politicians transformed their ideas when the media got involved.Therefore, the Sarbanes-Oxley Act is the effect of these political changes that were originally against.
The Sarbanes-Oxley Act accords a high importance to the quality and independence of an audit by increasing the authority to the audit committee on the Board. It also reflects its importance by the fact that each member has to be independent (by not receiving some benefits from other firms or companies). This will also strengthen the accountant’s independence. The price of audits will increase, but the benefits are improved. The Sarbanes-Oxley Act requires even more, it requires that it’s CEO and CFO to certify each annual or quarterly report filed based on their knowledge. This will make the CEO or CFO more responsible and will make him liable if such statements happened to be untrue. Also, the Act requires a disclosure of all off-balance sheet transactions. Let us not forget that a business judgement rule will not be interpreted like an untrue statement. Without a business judgement rule, a business man would be really reluctant to be part of an executive committee in any company. Indeed, the object of the Act is to punish fraudulent business decisions, not the ones that were made in good faith. The way to enforce such judgment is in the Sarbanes-Oxley Act by allowing the power of control that is given to the Board.
Like previously mentioned, Sarbanes-Oxley Act created an Oversight Board which has different tasks, including the establishment of standards for auditors, the inspection of public accounting firms, imposing sanctions, etc. The composition of such Boards reflects their independence (where only 2 out of 5 members can be current or former certified public accountants). However, since the leadership of the Board is important, some political issues arise when it arrives the time to nominate a chairman on the Board! Nonetheless, the Sarbanes-Oxley Act is nowadays well implemented.