The Sarbanes-Oxley Act of 2002 (SOX) was created to prevent fraudulent financial activities, and to provide investors with more accurate financial resources on corporations. Under SOX, companies are held accountable if they fail to maintain the requirements that were set forth in the act. The act requires companies to maintain satisfactory internal control measures, provide responsible financial reports, disclose periodic reports, and establish rules for annual reporting. (Hazels, 2010) These requirements are all part of the Generally Accepted Accounting Principles (GAAP). Corporations and accounting firms should have already been practicing these principles to uphold ethical behavior. However, the governing bodies charged with monitoring of corporate finances as well as their practices were outdated and that necessitated the reforms outlined in the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act’s Effect on Financial Statements
The Sarbanes-Oxley Act of 2002 has several sections that effect financial statements, reporting of finances, and other requirements that are placed on organizations. “Section 302 gives corporate responsibility for financial reports. This Section requires that the “principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed or submitted” that the signing officer reviewed the report, that based on that officer’s knowledge, the statements contain no fraudulent or misleading information, that the financial statements and other financial information fairly present all material aspects of the financial conditions and results of operation and that the signing officers have disclosed any fraud, material or not, to auditors and the audit committee.” (Hazels, 2010) There are other sections of SOX that deals with establishing rules for corporations in regards to their annual reporting and periodic reporting. Financial statements and reporting are the backbone of communicating the financial health of a company to investors, creditors, and the general public. This is why there is a high level of importance on the effect the Sarbanes-Oxley Act has on financial statements and reporting.
The Brooke Corporation
The Sarbanes-Oxley Act has been under much deliberation. In fact, many pose the question if SOX is even effective in creating ethical behavior and integrity in corporations. One example is to look at The Brooke Corporation, who have so far avoided having any SOX violations raised against them although they clearly violated several sections of the act. The corporation knowingly falsified and manipulated records, misappropriated funds, and did not have adequate internal control methods in place. “The BNY case may seem more obvious as one of the allegations clearly made is the case is that Brooke and its senior management knowingly manipulated financial statements. In addition, Mr. Orr could be liable in his own case if he did, indeed, misappropriate funds from the company as he would be signing financial statements knowing that they are false because he has taken funds from the company.” (Hazels, 2010) All of these situations led to unethical practices and behavior in the corporation’s accounting practices.
The situations that led to unethical practices and behavior could have been prevented if the company had the proper internal controls in place. The company did not create and foster a control environment. The management of the company did not establish a culture in which unethical behavior will not be tolerated, and they did not place a high value on integrity. This is illustrated by the fact there are allegations against Mr. Orr, the owner, for misappropriating funds. The company also did not properly use risk assessment, control activities, information and communication, and monitoring procedures. If the company had the proper checks and balances in place, then Mr. Orr would not have had all the different job titles ranging from owner, CFO, CEO, Chairman of the Board, and Director. They would have also had an auditor in place to review the financial statements and approve them. It is important that corporations maintain adequate internal control methods so that they prevent situations that lead to unethical practices and behavior in accounting.
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