Sarbanes Oxley Problem
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Sarbanes-Oxley Problem
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law (Hooley, 2005). The Act applies publicly held companies and their audit firms. It dramatically affects the accounting professions and CPAs working as an auditor of a publicly traded company. In response to a wave of high-profile corporate crime such as the Enron debacle, Congress passed the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), and President Bush signed the act into law on July 30, 2002. Sarbanes-Oxley was enacted to protect investors by combating corporate crime and improving corporate governance. As many commentators have noted, Sarbanes-Oxley requires companies to implement extensive corporate governance policies to prevent and timely respond to fraudulent activity within the company. For example, Sarbanes-Oxley expressly requires publicly traded companies to create anonymous hotlines for the reporting of fraud, and it requires executives to certify that their financial statements are accurate (Hooley, 2005).
Other provisions require companies to closely review their policies and procedures regarding internal investigations, and implement the necessary processes and tools to respond timely and effectively to reports of fraudulent activity. With the vast majority of information now generated in digital format, the recovery and analysis of digital data is the primary process for internal corporate investigations. In other words, for effective self-policing, including the timely detection and response to reports of fraudulent activity, companies must have the ability to acquire, search and preserve electronic data related to fraudulent activity ( Patzakis, 2003).
Many companies, however, are ill-equipped to acquire the necessary electronic data that is central to identifying and responding to incidents of fraud. While companies have spent considerable time adopting and amending policies in response to Sarbanes-Oxley, relatively few have implemented the information technology infrastructure that will enable companies to turn anti-fraud policies into concrete results. There is critical importance of internal computer investigations as a central component to maintaining adequate corporate financial controls under Sarbanes-Oxley, and why companies must establish a technical and procedural infrastructure to perform such investigations (Hooley, 2005). They are current challenges that companies face that they are not equipped to fulfill the intent of Sarbanes-Oxley.
Today, as we discuss the impact of Sarbanes-Oxley, including the cost and the burden that has been placed on American businesses, our attention has been turned to executive compensation. The sums many of Americas top corporate officers are being paid need to have a way to investigate this. The very least we should ask of them, is to certify the books in which their compensation packages are held. In fact, the trends which we see in executive compensation are a prime example of the lack of corporate responsibility that brought about Sarbanes-Oxley. Many of these packages show a general lack of accountability to shareholders, in which the benefits to a few outweigh an honest accounting to shareholders (Hooley, 2005).
These and other provisions require companies to closely review their policies and procedures regarding internal investigations, and implement the necessary processes and tools to respond timely and effectively to reports of fraudulent activity. With the vast majority of information now generated in digital format, the recovery and analysis of digital data is the primary process for internal corporate investigations. In other words, for effective self-policing, including the timely detection and response to reports of fraudulent activity, companies must have the ability to acquire, search and preserve electronic data related to fraudulent activity (Patzakis, 2003).
In 1993, the total compensation paid to the top five executives of U.S. Public companies was 4.8% of company profits. Now, only twelve short years later, that amount has more than doubled to 10.3% of company profits (Hooley). Shareholders are far more willing to foot the bill for proper accounting and continued investor confidence, than they do for providing golden parachutes to top ranked executives. The uneasiness about executive compensation goes beyond the mere dollar amounts and the percentages of company profits, although that alone should be troubling enough to investors. The alarming part is with the compensation that many executives receive, after turning in performances that would in many cases have landed the average employee out on the street at best, and at worst in jail (Hooley, 2005).
A lack of transparency and openness in the way top corporate executives are being compensated is leaving investors worried once again. Earnings manipulation, questionable mergers and acquisitions, and camouflaged compensation are not the recipe for rebuilding investor trust. It would be foolish to forget the enormous setback our markets faced only a few short years ago due to a lack of accountability to shareholders and badly shaken investor confidence. Public companies should keep the lessons of Sarbanes-Oxley close to heart, as they consider future compensation packages for top executives (Hooley, 2005).
A major component of the Congressional response to the shenanigans that has been going on in Corporate America was to reaffirm the primary responsibility of the Board of Directors and senior management for any misstatements in a companys Security Exchange Commissions filings, while increasing penalties for securities fraud. Sarbanes-Oxley broadened the scope of accountability for CEOs and CFOs by requiring them to personally certify their companys financial reports and disclosure controls