Sarbanes-Oxley Act Of 2002 Essay

The Sarbanes-Oxley Act of 2002 was passed by Congress to protect investors from fraudulent accounting records. The passing of the act forced strict regulations upon publicly traded companies to improve the accountability of accounting records for investors as a result of the extreme levels of malpractice that occurred in the late twentieth and early twenty-first centuries. The implementation of the SOX Act changed the way accounting records were checked for injustices. With the act, upper level managers were required to certify financial statements for accuracy (section 302), it required management and auditors to establish internal controls along with reports on the efficiency of the costly controls (section 404), and added required outlines for electronic record keeping (section 802).
To protect investors, Section 302 of the SOX Act required chief executive officers and chief financial officers of publicly traded companies to certify the accuracy of their company’s financial records. This component of the act was included in the bill to ensure that company heads were actively involved in the financial components of their companies. Reports and results also needed to be communicated to management in a timely matter. The

implementation of this act meant that CEOs and CFOs needed to certify that their company’s financial records and reports are accurate, complete, and correct. They were also required to assure investors and employees that all financial information has been recorded, accounted for, and reports are complete.
The Sarbanes-Oxley Act also incorporated Section 404 which added requirements for internal controls and public audits.

This section was included to reduce potential for fraud in publicly traded companies by adding more strict procedures and requirements for financial reporting. Management was responsible to create or enhance their internal controls and follow-up with a report assessing the effectiveness of the control structure. For many companies, this section was the most complicated and most expensive to implement because it also required management to report on the shortcomings of the controls. These reports also needed to be checked for accuracy by an external, registered auditor to confirm the operation and effectiveness of the

controls.
Section 802 of the SOX Act helped reduce document tampering and increase internal record keeping to ensure against fraud. The section holds anyone who tampers with records in any way responsible and can fine and or imprison those who have interfered with the authenticity of records. The retention policy was also increased and required any documents used in financial reports to be saved for at least five years from the end of the fiscal period in which the audit or review was concluded. Adding these regulations helps to ensure sincerity of company financial reports and certifies the truth of record for company employees, investors, and other companies.
Despite the attempt to eliminate fraud in publicly traded companies, it is nearly impossible to complete erase falsified records. In fact, a recent example of accounting fraud occurred in 2015 when Toshiba admitted to overstating profits by more than one billion dollars over a period of 7 years. The environment within Toshiba made it nearly impossible for employees to challenge management and forced employees to follow instruction to illegally move certain costs to different years and even eliminate some costs completely. Investigators found that profits had been stated early, losses had been pushed back, and proof of other similar techniques that resulted in overstated profits. The company received recommendations from investigators to prevent the business practices within Toshiba that lead to the fraudulent practices such as the reorganization of corporate society and reestablishment of internal controls.