SARBANES-OXLEY ACT 2002 IN MY OWN OPINION Essay Example | Topics and Well Written Essays - 500 words

SARBANES-OXLEY ACT 2002 IN MY OWN OPINION - Essay Example The solution that was implemented is known as the Sarbanes-Oxley Act of 2002 (SOX). The Sarbanes-Oxley is a piece of legislation that changed the business world forever. The Act was created in order to raise investor confidence in the marketplace. One of the major problems the markets were facing was that greedy corporate officials were taken advantage of their position in order to make themselves rich at the expense of the shareholders and other stakeholders of the company. The Sarbanes-Oxley Act fixed the problem by making the CEO and top officials liable in cases of fraud. The section 302 of the Sarbanes-Oxley Act mandates that senior management certify the accuracy of the financial reports (Answers, 2010). If there is fraud present in the financial statement of a company the top executive of the firm faces fines of up to $25 million and prison terms of up to 20 years. Another problem that existed prior to the creation of SOX was the possibility of collusion between the external auditors and the executive managerial staff. In the Enron case the auditors knew about the fraud, but decided to stay quiet due to economic interest. SOX changed the rules of the game with the creation of the independent auditor report. An auditing firm of a public corporation cannot have any other accounting contracts with the firm they are auditing. SOX also helped prevent fraud because it implemented new internal control protocols that help prevent fraudulent activity. Section 404 of SOX requires that each annual report of a public company contain an internal control report. The internal control reports have to include the following two things: a) A statement of management’s responsibility for the establishment of an adequate internal control structure for financial reporting; b) assessment of the effectiveness of the internal control structure at the conclusion of the latest fiscal year (Sec,