Impact of the Sarbanes-Oxley Act
Companies have used creative accounting methods for many years. Some of the creativity may not have been illegal, and most likely not unethical. However, since there were no controls in place, the creativity did become unethical and illegal. The most famous of course is Enron, but there were others such as HealthSouth, WorldCom/MCI, Tyco, and other publicly traded companies that violated federal laws and established accounting principles. The most embarrassing aspect of these accounting scandals is that the accounting firms charged with enforcing accounting standards and performing the external audits were actively and knowing involved in the illegal behavior. The result of the failures of these companies was devastating. Pension funds were bankrupted, thousands of employees were laid off, and foreign countries were left to generators for electricity. The accounting firm Arthur Andersen, one of the largest, was shutdown almost overnight.
The US Congress passed the Sarbanes-Oxley Act and President George W. Bush signed the act into law as a means to prevent future accounting scandals. The purpose of the act was to put into place oversights and controls for publicly traded companies. The law is complex and critics assert that compliance is difficult. Critics argue that the accounting reforms will do little to prevent the bad business practices that were the underlying of the scandals (Doherty, B., 2006).
One financial consulting group has estimated that compliance cost business over $15 billion dollars in 2004. (Doherty). This estimate may be high and hard to quantify, but there is a real cost to implementation. In a survey by Resources Global Professionals of 200 executives of Fortune 50 companies, 86% said compliance costs were high than expected. Some executives responded that auditing costs increased as much as 90% (Gomez, A., 2005). There are other substantial costs to implementation of SOX.
Section 303 requires the CEO...