Sarbanes-Oxley Act

Effects of Sarbanes- Oxley Act

With the enactment of Sarbanes - Oxley Act in 2002 , corporations including foreign corporations and the external auditors have mostly been affected and burdened with newly found responsibilities under the act . Companies are now responsible for a number of reporting and certification responsibilities whereas auditors have to assume additional responsibilities of evaluation of internal control systems among others responsibilities and form an opinion keeping their independence intact . In this write up it has been tried to bring forth the real effects of Sarbanes- Oxley act on these

mostly affected parties , namely companies , external auditors and foreign corporations

A . Effects on corporations

`The Sarbanes- Oxley Act of 2002 (S-OX , passed in reaction to highly publicized corporate scandals , requires high levels of accountability from companies and their senior executives to verify the policies process and procedures behind each company 's financial reports , and every business operations (Craiq Rhinehart )1

Sarbanes Oxley Act is attracted to all companies , whether small or large if they

reports with the Security and Exchange Commission (SEC ) under 1934 Act of SEC , or

registered with SEC under 1933 Act

Further there are certain specific provisions that are applicable only to listed companies

The major issues that are controlled under the act and affect the companies directly are discussed and detailed as under

Formation of Audit Committees

As part of control actions , companies are directed to form `audit committees ' from the members of board . The important thing is that one of the members of audit committee must be a financial expert

Financial expert has been stated to be one who possesses who has an understanding of GAAP , internal control , and financial statements Financial expert must have experience in preparing , analyzing , and evaluation of financial statements . The objective is that members of audit committee must be technically capable to control and analyze the activities of auditors

Also , members of audit committee must be independent of management of the company . That means no one from the management of the company can serve as member of the audit committee

The audit committee is authorized under the act to select , compensate and oversee the company 's external auditors as part of their activities The auditors are not allowed to provide services other than audit to the company unless those are approved by the audit committee

Services other than audit provided by the auditors to the company with approval of audit committee have to be disclosed while reporting to SEC

2 . The most important and controversial aspect of compliances under SOX is the

certification by the Chief Executive Officer (CEO ) and Chief Financial Officer (CFO

that financial statements of the corporation comply with the requirements of the SEC

Act 1934 and further that all material information in financial statements clearly and

fairly state the financial condition and the financial results of the entity

The SEC rules require that a company s a report annually on its internal control systems and such report contains the following element

A statement of...