The Introduction of the Sarbanes Oxley Act Essay

The recent dramatic fiscal dirts in America affecting major international corporations have resulted in wrapping of legislative alterations. The first piece of statute law to emerge has been the 2002 Sarbanes Oxley Act. Critically measure this piece of statute law with regard to the direction of the internal controls of a corporate Information System. Include in your treatment as to how such statute law has impacted on houses runing in the City of London.

Keywords: Internal control, Sarbanes-Oxley, Material Weakness, SOX


Due to recent high-profile accounting dirts, regulators and investors have become more concerned with the seasonableness every bit good as quality of fiscal coverage ( Elttredge, et Al. 2006 ) . Section 404 of the SOX act requires direction and external hearers to describe on the adequateness of an administration ‘s internal control over fiscal coverage. The execution of the SOX act is really of import for any administrations who want to run a seamless concern procedures and besides have their fiscal statements audited. Since the SOX statute law came into consequence, SMEs will necessitate to be equipped for their statements to be audited. Harmonizing to Jim DeLoach, pull offing manager with Protiviti, “ Smaller populace companies need to fix now for their Section 404 audits in order to forestall a ‘fire drill ‘ prior to the December 15 deadline.

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The transition of the Sarbanes-Oxley Act ( SOX ) in 2002 has made certification accomplishments even more of import and besides has changed the day-to-day work of the fiscal comptrollers, hearers and others (, 2004 ) . Basically SOX requires strategic determinations to be undertaken to set up, keep and measure the effectivity of the internal control over fiscal coverage. Weakness in a steadfast internal control means their fiscal statements are exposed to scrutinize cheques and a combination of lacks. With regard to the statute law, we can non discourse SOX without taking a closing expression at a company ‘s internal control systems. Internal control helps hearers to observe mistakes of a corporate information system and besides inquiries the steadfast unity with respects to their fiscal records and mark offs. Internal control over fiscal coverage can be defined as “ a procedure designed by, or under the supervising of, the company ‘s chief executive and chief fiscal offers, or a individual ‘s acting similar maps, and effected by the company ‘s board of managers, direction, and other forces, to supply sensible confidence sing the dependability of fiscal coverage and the readying of fiscal statements for external intents in conformity with by and large accepted accounting rules ” ( PCAOB 2004, ) . With the aid of internal control in SOX, the board of managers and direction are able to safe guard the company ‘s assets and record accurate and dependable fiscal information.

Such statute law ( SOX ) is used widely in the public sectors chiefly to protect the stockholders and besides to safeguard company ‘s assets but some houses are yet to implement SOX. Public companies are describing the effectivity of their Internal Control over fiscal coverage as required by the Sarbanes -Oxley Act of 2002 (, 2005 ) . Further in this reappraisal, we will concentrate on 2 inquiries raised. First we evaluate the Sarbanes -Oxley statute law with regard to internal controls of a corporate information system. Following, will look at internal controls and SOX in item and discourse how this statute law can assist impact on a house operating in the metropolis of London.

Internal Control

The Sarbanes-Oxley Act of 2002 applied important alterations on how fiscal coverage is processed ( Ramos, 2004 ) . As portion of the procedure, direction are required to supply a elaborate study detailing fiscal information and operation within their house ‘s facet of the entity internal control. The importance of internal control and the demand for internal control criterions is long standing ( Kinney et al. 1990 ; Hermanson 2000 ; Kinney 2001 ) . An effectual system of internal control must be within all administrations to assist them accomplish their mission every bit good as their ends for long term sustainability. One of the primary aims of AIS ( Accounting Information Systems ) is to command a concern administration. This is achieved by understand the information system implemented within an administration and besides by accomplishing equal security control over information resources. The term internal control can be defined in assorted ways. Romney and Steinbart, ( 2006 ) defines internal control as “ the procedure implemented by the board of managers, direction and those under their way to supply sensible confidence that objected is achieved ” . Some of these aims are:

Assetss are safeguarded, including forestalling or observing

Maintain records in sufficient item to accurately and reasonably reflect company assets

Accurate and dependable information is provided

Complying with applicable Torahs and ordinances

Promoting attachment to order managerial constabularies.

Trenerry ( 1999 ) besides defines internal control as “ a system of cheques and controls instituted by the assorted degrees of direction and are integrated into fiscal and non fiscal Activities to guarantee all facets of the concern are conducted efficaciously and expeditiously ” . Internal control comprises constabularies, patterns, and processs employed by an organisation to accomplish four wide aims as explained above ( Hall, 2007 ) . Some of the property taking to inadequate accounting resources comes from the deficiency of stuff failings.

Previous literatures by Bagranoff et al 2007, advocate that a strong system of internal control is important to effectual endeavor hazard direction and is of great involvement to exceed direction, hearers and external stakeholders. Hall ( 2007 ) states that failing in an internal control system may expose the house or administration to one or more of the undermentioned types of hazards:

Destruction of assets

Larceny of assets

Corruptness of information or the information systems

Break of the information system

Public call environing ethical misconducts and deceitful Acts by executives of Enron, Global Crossing, Adelphia, WorldCom and many more in the concern universe over the past decennary has caused many inquiries to be asked whether the bing federal securities Torahs were equal to guarantee full and just fiscal revelation by public companies ( Hall, 2007 ) .

Most significantly is the Enron dirt. The Enron dirt as revealed in October 2001, involved the energy company Enron and the accounting and auditing and consultancy partnership Arthur Anderson. The corporate dirt in this blink of an eye led to the ruin of Enron and ensuing in one of the largest bankruptcy on the American History. The Enron dirt is critical because of the money and occupations that were lost and besides because so much of it appears to be straight related to the adept use of accounting records. Due to the complexness of the dirt, the consequences were to minimize the liabilities of the company every bit good as blow uping its net incomes and net worth. In the wake of the dirt, many of the top participants at Enron were indicted for a diverseness of charges and were subsequently sentenced to prison.

Adelphia, overseas telegram telecasting supplier on the other manus used off-balance sheet funding to conceal one million millions of dollars in debt from the eyes of stockholders and creditors. It besides fraudulently increased net incomes by blow uping overseas telegram subscriptions. The laminitiss of Adelphia where charged with securities misdemeanors on August 2007. In contrast to WorldCom, the telecommunication company were besides under probe for improper accounting patterns. WorldCom, one of the biggest telecommunication companies was besides thrown into convulsion when “ it came to visible radiation that the company had steadily overstated its grosss by $ 9 billion to run into Wall Street net incomes outlooks. In April 2001, WorldCom direction decided to reassign transmittal line costs from current disbursal histories to capital histories. Investors lost immense sums of capital and 1000s of workers were laid off ” ( Bagranoff et. Al. 2007 ) . Due to the corporate dirts with the listed administrations above and others, Sarbanes-Oxley Act of 2002 was passed on to clean-up on houses and executives responsible for perpetrating corporate fraud.

Sarbanes-Oxley Act and Impact on UK City houses

The SOX statute law was preceded by a drawn-out and combative argument over the benefits and branchings of revelations refering direction ‘s duties for fiscal coverage ( El-Gazzar, S et Al ) . In 1977, a Foreign Corrupt Practices Act ( FCPA ) was put in topographic point to Act upon the manner corruptness and graft within accounting profession. The primary intent of this Act was to forestall the graft of foreign functionaries in order to keep concern. As this Act did non forestall corporate dirts in the US, these resulted in diminution of public trust in accounting and coverage patterns. Harmonizing to Romney and Steinbart, ( 2006 p.193 ) , “ the air passages and print media in the late ninetiess and early 2000s were full of accounting frauds and jobs at major houses such as Enrons, WorldCom, Xerox, and other companies. ” The SOX Act statute law was written to cover with jobs related to capital markets, corporate administration and the scrutinizing profession and has basically changed the manner public companies do concern. Harmonizing to Baltzan ( 2008 ) , SOX states that all concern records, including electronic records and electronic messages, “ must be saved for non less than five old ages. ” The effects for disobedience are mulcts, imprisonment, or both.

For a house to run within the accounting sectors in the UK, they must follow with the SOX Act 404. The most combative facet of SOX is Section 404 Act ; aimed at Management appraisal of internal control. Section 404 ( a ) requires each one-year study to incorporate an internal control study which shall “ province the duty of direction for set uping and keeping an equal internal control construction and process for fiscal coverage ( Sarbanes-Oxley Act of 2002, Public Law 107-204 ) . The rudimentss of this Act are designed for direction which requires direction and the external hearer to describe on the adequateness of the company ‘s internal control over fiscal coverage ( ICFR ) . This is the most dearly-won facet of the statute law for companies to implement, as documenting and proving of import fiscal manual and machine-controlled controls requires tremendous attempt (, 2008 ) . The research worker agree to some extent that this piece of statute law can assist a house within the UK but certain steps needs to be address before houses in the UK commit to Sarbanes Oxley Act. Evidence from published diaries shows that a great sum of money are spent on the Sarbanes Oxley Act but success does non go on immediately. Such statute law introduced can impact the impact of houses in the UK. The greatest concern being is the valuable clip major administrations will pass with their clients, they will alternatively pass clip adhering to strict tight Torahs alternatively of acquiring the occupation done as required by their clients. There is some grounds Nixon ( 2005 ) , as cited by Brown that in 2004, the Big Four houses lost six hundred and nine clients, while merely taking on two hundred and one for that twelvemonth. 40 % of these goings were because the house resigned due to the over onerous work load of SOX commissariats. Ernst & A ; Young, for illustration, lost 208 clients in 2004, while deriving merely 30 (, 2005 ) . This is besides supported by Bagranoff, et. Al 2007, who stated subdivision 404 in contrast requires “ direction to implement and measure internal controls and so the independent hearers must measure direction ‘s appraisal ” .

Harmonizing to a recent article, Pilgrim ( 2004 ) as cited by O’Conor ( 2005 ) stated that IT managers in many of the UK ‘s fiscal services and houses are likely to be caught on the hop by the deductions of recent international conformity enterprises, such as the Sarbanes-Oxley statute law. The debut of SOX is besides said to be holding major influence on corporations outside the US who needs to be compliant with the statute law or pull an interesting differentiation between undertakings. The complexness and stubbornness required for fixing a concern for conformity with Sarbanes Oxley Act is really high. This procedure of SOX is turning to be more hard, clip consuming and expensive than the originally prognosis or budgeted for. It is said that the mean cost of conformity with Section 404 for the first twelvemonth of conformity entirely for a major concern in the UK is estimated to be between ?10-20 million and devour about 20 FTE-years of internal clip (, 2005 ) . A house operating in the City of London can financially pay this sum of money to implement SOX but in the current economic system province, should the SOX statute law fail, it will be the house quiet a significant sum of money. Despite this loses, it is estimated that up to 20 % of companies will neglect SOX in the first twelvemonth and will hold to describe that they have materialise failing in the fiscal coverage. As their statements have failed, hearers are expected to be less critical with their findings for the twelvemonth.

As supra, we understand SOX applies to big administrations and SOX requires companies to execute hazard appraisal of current information security to back up the unity of corporate fiscal information. However non all big administrations comply with SOX. Harmonizing to O’Conor ( 2005 ) , A CEO or CFO who submits an inaccurate enfranchisement is capable to a all right up to $ 1 million and imprisonment for up to 10 old ages. Should all these mulcts be imposed, big administrations have no grounds but to fall in the SOX Act. Non US states will be given guidelines of the demands of SOX Act. This statement has been approved by a similar quotation mark from different surveies. Harmonizing to Kate Litvak ( 2006 ) , “ the Sarbanes-Oxley Act ‘s consequence on Non-US companies cross-listed in the US is different on houses from developed and good regulated states than on houses from less developed states ” . This proves that companies outside the US companies from severely regulated states benefit from better recognition evaluations by following with ordinances in a extremely regulated state ( USA ) that is higher than the cost, but companies from developed states merely incur the cost, since transparence is equal in their place states every bit good ( Act, 2007 ) . Administrations in UK need to understand that SOX conformity is non easy and measures demands to be undertaken to run into deadlines and demands. Achieving SOX in the long term benefits an organizational position and besides consequence in better IT substructure and to run into the terminals of concern procedures.

SOX deductions highlight a figure of hazards for a figure of houses in the UK. Achieving SOX can hold a negative or positive impact on an administration ‘s position. Harmonizing to Alex Cohen, a US securities spouse in Latham & A ; Watkins ‘s London office, says: The betting is that around 20 per cent of companies will describe internal control jobs. Then it becomes even more dearly-won, because they have to acquire it right. The good intelligence is one time they have done it, the strength of the work required and the costs will taper off ” ( Coleman, 2005 ) .


The Sarbanes -Oxley Act is designed to yearly buttockss and study on effectivity of internal control over fiscal coverage and besides to protect the investor ‘s involvement. With the base on balls of this statute law in 2002, there have been tight internal controls and steps in topographic point to stop the high accounting dirts which dominated the US air passages in the 90s. This study has opened a new way as SOX has forced administrations to move now or confront major punishments. At the strategic degree, directors can non merely mark paperss they need to be cognizant of what they are subscribing and have a crystalline position of their fiscal statements. SOX conformity requires strong and unafraid corporate information system to avoid material failing and put a benchmark for other direction degrees runing from tactical to strategic degree to adhere for better internal control intent. I besides believe SOX in a City of London is will hold a greater impact as London is known for fiscal services it provides to the Bankss and other investings and with big among of dealing being conducted in the capital, a crystalline statements should be every bit accurate as possible. In the above study, it is stated that the Big Four houses lost six hundred and nine clients, while merely taking on two hundred and one for that twelvemonth. 40 % of these goings were because the houses had resigned due to the over onerous work load of SOX commissariats. When SOX execution is successful, it has a good strategic impact on the administration but when it fails, the terminal consequence can ensue in a fiscal debacle for a house. This survey has helped me understand the importance of SOX statute law. From this reappraisal, it is really necessary for top directors to present as there is considerable complaisance among UK concerns about SOX ( Coleman, 2005 ) .

Good internal control requires both fiscal resources and company clip, and may non be a precedence for houses that are concerned about merely remaining in concern ( McVay and Ge, 2005 ) . An effectual Internal Control system must be in all administrations help minimise hazard and although a figure of models where introduced, this was non sufficient to forestall the fiscal dirts which took topographic point. In add-on, the cost deductions for SOX are an extra duty to any administration. The cost to engage external hearers and taking clip off work can be really important and can ensue in loss of private assets as more clip will be spend look intoing the extent of the paperss. In the long term, SOX conformity may ensue in better organized administration construction and to supply better stableness for the administration.