Sarbanes-Oxley Act Coursework Example

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Sarbanes Oxley Act
The Enron scandal motivated the creation of the Sarbanes Oxley Act (SOX). Enron used to be one of the largest and was also considered one of the most financially stable companies in the United States. The company was involved in various business ventures that dealt with energy; it purchased and sold gas and oil. Enron also had power plants and had set up oil refining facilities. Enron grew to become one of the largest companies in the world dealing with communications, paper and pulp, gas and electricity. However, in 2001, Enron was declared bankrupt (Peavler n.p.). A few years before this incident, the government had put in place various deregulation measures in the gas and oil industry to made it possible for other companies to compete with the already dominant companies. The new standards made it possible for the company to cheat the public about its financial status.
Some of the fraudulent activities committed by the company were extensive and were ongoing. One of the main misleading acts that had severe damaging effects was misrepresentations of exaggerated reports on earnings which were provided to the shareholders who eventually suffered significant losses after the bankruptcy. Also, there were other misconducts carried out by the company such as illegal manipulation of the energy market and embezzlement of corporate funds. The Enron scandal was enough to show that there was a need to come up with new compliance standards for the public to verify accounting reports from companies.

The United States Congress passed SOX in the year 2002 with the intention of providing investors with a form of protection against fraudulent activities by companies when handling accounting information. The two key provisions of the Act are Section 302 and 404. The mandate contained in Section 302 requires a company’s senior management team to certify the accuracy of the firm’s financial statements. Section 404 requires the auditors and management team to put in place adequate internal controls and reporting methods.
The size of the company determines the influence of the Act on a firm’s incentive; it is expensive for the small businesses to establish and maintain internal controls outlined in Section 404. The resources required to comply with internal control vary with small margins despite significant changes in the size of the company (Kasuske n.p.). Large companies operate on huge budgets which makes it possible to allocate the necessary funds required to comply with section 404. However, small firms have to sacrifice a significant share of their budget to ensure they comply with Section 404 of the SOX Act.
From a personal perspective, the SOX legislation is a useful tool as it allows shareholder and investor to receive accurate financial information from companies. Firms can no longer provide deceitful data by hiding their losses like Enron once did. Shareholders believed that the company was making profits when in the real sense the improved revenues were just projections and not the actual financial figures. After the bankruptcy, the shareholders also suffered the losses resulting from the company which could have been prevented if Enron disclosed accurate information about its commitments, risk profiles, debts, and assets. From this information, conducting company risk assessment allows shareholders to make highly calculated decisions on where to safely invest their money. However, the SOX Act should undergo some minor amendments to reduce the substantial costs required for small companies to comply with Act.

Works Cited
Kasuske, Loren. “The 4 Biggest Pros And Cons Of The Sarbanes-Oxley Act.” Ktconnections.com. N.p., 2017. Web. 13 Mar. 2018.
Peavler, Rosemary. “Enron, The Sarbanes-Oxley Act And Corporate Fraud.” The Balance. N.p., 2017. Web. 13 Mar. 2018.