There were a great number of businesses and corporations, before the creation of the Sarbanes-Oxley Act (SOX), which were conducting illegal and fraudulent practices in order to show that their organization was making a huge profit. A lot of the internal control procedures that was discussed in our textbook either didn’t exist or, if existed, were never enforced within these businesses. There were many factors that caused a lot of the scandals, such as Enron and WorldCom, to be brought to light. In response to these illegal practices and the fallout from Enron and WorldCom’s faulty financial statements, members of Congress were pressured by investors, who were left with nothing, to draft up legislation to regulate procedures and prevent a catastrophe like the Enron scandal from happening again. Hence, Senator Paul Sarbanes and Representative Michael Oxley drafted and sponsored the creation and passage of the Sarbanes-Oxley Act of 2002 [ (Sarbanes-Oxley Act) ]. However, one may wonder how does the SOX relates to internal control.
The SOX set many new regulations on internal control on the financial reporting of companies. Before SOX, auditing firms were self-regulated, and after SOX was enacted, the Public Company Accounting Oversight Board was establish to oversee the work of auditors of public companies. This prevents and controls how auditing firms interact with companies. With an independent auditing firm, there was no chance of “looking past” mistakes purposely made by the company’s accountant(s) in order to show a profit [ (Sarbanes-Oxley Act, 2002) ].
The SOX required internal controls for assuring the accuracy of financial reports and disclosures. It also mandated audits and reports on these controls. The government really wanted to ensure nothing was left hidden from the reporting process.
The relation of the SOX and internal controls is also seen in the procedure of assigning responsibilities to senior executives. The SOX set how...