Benefits of Sarbanes-Oxley Act of 2002.
Benefits of Sarbanes-Oxley Act of 2002
Companies are obliged to operate within the confines of the national law and shareholders expectations. Observing important regulations set by the government and other regulatory agents is necessary for smooth operations within a company. Auditing is one of the issues that have several companies at loggerheads with the authorities. Before the adoption of the Sarbanes-Oxley Act of 2002, many companies were conducting shoddy audits in a bid to dodge payment of taxes. Thus, the adoption of SOX has been vital in combating financial fraud, improving financial reporting, and lifting investors’ confidence (Wagner & Dittmar, 2006). For example, auditing fraud in major companies such as Worldcom and Enron caused their dramatic downfall due to the lawsuits they were engaged in. Consequently, the downfall of these companies was to the detriment of the shareholders and the management. Therefore, this underscores the significance of observing ethical regulations in an attempt to be on the safe side with the law.
Sarbanes-Oxley Act of 2002 has had a tremendous impact on effective management in most companies. This is because it recommended for the adoption of a strong internal control within companies (Weil, Schipper, & Francis, 2012). Subsequently, the adoption of internal control in most major companies has had a significant impact on effective financial reporting. Evidently, a strong internal control has helped in the elimination of fraud in most of the companies. According to Wagner and Dittmar (2006), external auditors have ascertained that internal auditing has increased transparency and compliance to the policies and procedures set.
Moreover, Sarbanes-Oxley Act of 2002 has led to improved documentation. As a result, most companies have resulted to automated documentation as opposed to manual documentation. This is because the former has helped several companies to update their information regarding changes that take place regularly. According to Wagner and Dittmar (2006), BlackRock, PepsiCo, and CFO companies have benefited significantly from automated documentation. For instance, BlackRock was able to update its job descriptions to suit their current requirements.
Increased Auditing Quality
When auditing is transferred from external auditors to internal auditing committees, the quality of auditing improves significantly. This is because internal committees of auditors work independently from the influence of shareholders and the management. Therefore, the adoption of auditing oversight committee has also helped to improve the quality of auditing significantly. According to Vowler (2005), more than 90% of auditors ascertained that working in independent auditing committees significantly increased the quality of auditing in most companies. Moreover, internal auditing committees have helped in the adoption of new financial information systems that abhor financial fraud and crimes in the auditing process (Goelzer, 2003).
Simplification of Complex Processes
Adoption of SOX has helped several companies to simply complex operation process. For instance, companies with several outlets that offer different products may find it hard to succeed due to the operation inconsistencies. SOX help in eliminating those inconsistencies by creating an independent control in every outlet and adoption of consolidated financial data information systems. That enhances the flow of operations at eliminating the complexity that could have been experienced in reconciling financial data. For instance, Mark Buthman, the vice president of Kimberly-Clark, accepted that Sarbanes-Oxley helped the company to spot inconsistencies in the manual journal entries (Wagner & Dittmar, 2006).
Despite the initial challenges experienced in the implementation of SOX, its success has outweighed the insufficiencies it was thought to be having. Evidently, SOX has helped to eliminate fraud in financial reporting, through consolidation of financial data and installation of independent auditing committees and oversight committees. The success has not only been in the financial sector, but also in improving organizational performance and investors’ confidence.
Dittmar, S. W. (2006). The unexpected benefits of Sarbanes-Oxley. Retrieved from https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
Goelzer, L.D. (2003). The costs & benefits of Sarbanes-Oxley section 404. Retrieved from https://pcaobus.org/News/Speech/Pages/03212005_GoelzerCostsBenefitsofSOX404.aspx
Vowler, J. (2005). Sarbanes-Oxley compliance can reduce audit costs and bring business benefits. Retrieved from http://www.computerweekly.com/feature/Sarbanes-Oxley-compliance-can-reduce-audit-costs-and-bring-business-benefits
Weil, R. L., Schipper, K., & Francis, J. (2012). Financial accounting: An introduction to concepts, methods, and uses (14th ed.). South-Western College Publishing.
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