The prospects offered by globalization and the accrued benefits from technological innovation have greatly influenced the growth of the business realm in the 21st century world. Despite the increment in success rate of businesses and expansion to global markets, financial misconduct within organizations has threatened to derail the financial success and better public investment decisions (Onyebuchi, 2011). Sprouting from this likelihood of financial misconduct and its detrimental effect, Sarbanes-Oxley Act was enacted in 2002. The genesis of this law can be traced back to a period between years 2000 and 2002 when United States was marred with a perverted upsurge in corporate accounting scandals that tainted the United States securities market and led to loss of public funds invested in listed companies. Scandals of organizations like Adelphia, Peregrine Systems, Tyco International, and Enron among others were great primers to the need for a law regulating the financial accounting profession (Orin, 2008). This paper uses Sarbanes-Oxley Act (SOX) to delineate the main aspects of the regulatory environment for corporations aimed at protecting the public from fraud. Moreover, it will evaluate the effectiveness of SOX in taming future frauds.
Financial fraud in the context of SOX is used to denote financial reporting that omits crucial information or misreports the financial stand of an organization to deliberately portray a positive outlook of the organization (Schlesinger, 2002; SOX 2004). For example, accountants might decide to classify financial information as nonfinancial with the intent of masking an accrued loss. Whether financial misreporting is done deliberately or erroneously, it constitutes financial fraud and this is the reason keen examination of financial reports is
SARBANES OXLEY ACT OF 20023
advised before publishing them. The inflated financial reports that arise from fraudulent accounting are great primers to an abrupt shift in securities exchange markets. This shift results from investors move to prefer stocks of organizations depicted as financially strong (Onyebuchi, 2011). However, such a move arising from misreported performance would risk drowning investors’ cash on securities that will never yield profit. This resulting loss of public cash has greatly made SOX a highly needed legislation for its provisions on control of financial fraud (Orin, 2008). The crucial accounting malpractices that constitute high-level financial fraud include but not limited to taking off-balance sheet crucial items as well as depicting as non-financial information that would have otherwise been considered financial.
After enactment of SOX, it has become mandatory for corporate organizations’ top management to ascertain and certify the accuracy of financial reports individually before they endorse them (Orin, 2008; Kessel, 2011). As such, although junior financial officers through the chief financial officers prepared the statements, individual...