Sarbanes-Oxley Act of 2002
Like all structures, accounting requires a strong foundation. For accounting, part of that foundation is the ethical behavior of those who practice its rules. Ethics refers to a code or moral system that provides criteria for evaluating right and wrong behavior: Investors, creditors, government, and the general public rely on ethical behavior among those who record and report the financial activities of businesses. A lack of public trust in financial reporting can undermine business and the economy.
The dramatic collapse of Enron in 2001 and the dismantling of the accounting firm Arthur Andersen in 2002 severely shook investors’ confidence in the stock market. Some questioned the creditability of corporate America and well as the accounting profession.
Public outrage over a number of accounting scandals at high-profile companies increased the pressure on lawmakers to pass measures that would restore creditability and investor confidence in the financial reporting process. These pressures resulted in the issuance of the Public Company Accounting Reform and Investors Protection Act on 2002, commonly referred to as the Sarbanes-Oxley Act (SOX), named for the two congressmen who sponsored the bill.
On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002 (H.R. 3763). This law affects the accounting profession like no bills enacted since The Security Exchange Acts of 1934 and the Securities Act of 1933. It is a federal law that mandates certain practices in financial record keeping and reporting for corporations.
The Sarbanes-Oxley Act provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators. These increased requirements have dramatically increased the need for good accounting and, at the same time, highlighted the value of accounting information to investors and creditors.
This law contains eleven provisions (Titles I-XI) that place requirements on all U.S. public companies and their management and boards of directors, as well as public accounting firms. A number of provisions also apply to privately held companies, such as the willful destruction of evidence to impede a federal investigation.
Please familiarized yourself with the bill. Use the link below to assist in completing this assignment: https://www.congress.gov/bill/107th-congress/house-bill/3763
In addition to the Sarbanes-Oxley act, the United States Occupational Safety and Health Administration (OSHA), administers and enforces the Whistleblower provisions of more than twenty (20) statutes including financial reform. These statutes protect employees from retaliatory actions administered by employers. You can read more here: https://www.whistleblowers.gov/
Important as such legislation is in supporting the ethical foundation of accounting, it is equally important that accountants themselves have their own personal standards for ethical conduct. Accountants need to develop their ability to identify ethical situations and know the difference between right and wrong in the context of accounting topics. One of the keys to ethical decision making is having an appreciation for how your actions affect others.
When you face ethical dilemmas in your professional life (and also personal life), you can apply the following framework as you think what to do:
I. Identify the ethical situation and the people who will be affected (the stakeholders).
II. Identify prevailing frameworks (laws, standards, codes, etc.) to use as a guide.
III. Specify the options for alternative courses of action.
IV. Understand the impact on the stakeholders.
V. Decide on the best course of action.
