Big4Guy

The passing of the Sarbanes Oxley Act in 2002 has been largely a result of the public outcry with events like Enron, Parmalat, WorldCom to name a few. I tried to understand the key goals which Mr.Sarbanes, Mr.Oxley and the SEC must be having in the back of their mind and what they could possibly be trying to achieve with this piece of legislation. Below are my thoughts on the same -

The number one reason is better "Disclosure". Today, an ordinary investor in the stock market wants a true an honest picture of the company he wants to invest in. This he can achive if he has an accurate report of the company's financial history and future motives. Disclosure as I understand should have the following key characteristics to be effective -accurate, timely, comprehensive and understandable. Take any one out and Disclosure would never serve the purpose.

The second goal of the Sarbanes Oxley is better Corporate Governance. Good Corporate Governance is an end result of how well the Corporate Environment, Processes and Procedures are aligned with the Control requirements of a business. I strongly believe that the culture set by the Senior management has a very important role to play in ensuring good Corporate Governance. SOX aims to highlight the need for better Corporate Governance in companies.

The next aim is naturally to strengthen the internal controls of a company. In any business or for that matter business process, many controls are generally placed by the management to control the process. The might be manual, automated, preventive, detective etc. Sarbanes Oxley aims at strengthening the Internal Controls of a company which gives assurance to the management as well as investors that controls within the company are effective and working continously throughout the period. SOX aims to achieve this by management and auditor certification of internal controls.

Lastly, I feel that setting up a Public Company Accounting Oversight board PCAOB is a right step forward. Since there is now a seperate body which will monitor companies, accounting firms this helps in building investor confidence and contolling the work of accounting firms.