Running head: SARBANES-OXLEY ACT

Sarbanes-Oxley Act
John Wall
University of Phoenix
Accounting
561
Jonathan Rubin

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Sarbanes-Oxley Act

Aspects and role of regulation environment in corporations

Regulation in corporations plays a vital role in shaping and modifying the behavior and
conduct in corporations. It also plays a vital role in protecting the general public from fraud and
enhances environmental output in corporations and general performance. While some firms
perform better, some still perform poorly. This can especially be attributed to either pressure
from authorities or presence of strict implementation of regulations in these corporations. Many
public and private corporations had been accused of fraud hence calling for creation of audit
committees to enhance the truthfulness and subsequent integrity in the corporal environment as
well as for the sake of the financial information that is given to the public by corporations. There
should be no conflicts of interest while preparing the financial statements as well as the audit.
The committee however proved ineffective due to fraud and scandals that continued to be
experienced and regulators decided to formulate and reform these committees to enhance
transparency in corporations. The Sarbanes Oxley act of 2002 was introduced and passed as one
of the reforms in an attempt to protect the public from fraud and scandals in corporations. These
committees were given a higher authority and responsibility. The committee may formulate
independence rules and regulations in order to protect investors and the general public from
fraud (Brian, 2012).
Aspects of the regulatory environment
An audit committee of approximately six members is a key requirement for the formation
of a committee. Of these committee members, directors from outside the corporation should be
composite where one of the directors must have expertise in finance. A financial expert in this

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case scenario should have the required educational qualification and some experience on
financial matters. The financial expert should also be able to understand financial statements and
the standards and principles applied in the preparation of the same. The expert should also be
experienced in internal audit control in the corporation. These directors from outside should be
independent and have aspects of financial literacy. The fact that the committee is independent is
a clear indication of the authority of the committee meaning that it cannot be in any way be
influenced in its decisions. Directors from outside the corporation are a requirement because they
are not likely to be corrupted by company officials. The audit committee has the following roles
to play in an attempt to ensure transparency and protect the public from fraud in financial
reporting.
The committee oversees the reporting of financial information and final accounts in
specific. They evaluate the accounting decisions the management made and assess whether
accounting principles were taken into consideration. The officials of the committee do this by
occasionally interacting with companys top management and subsequently assess whether they
are capable of making good and appropriate decisions of management that are not likely to affect
the general performance of the company. Malpractices that could arise by accountants both in
action and practice, these committees probe into allegations and investigate any claims against
these accountants.
Any external auditor in a corporation is approved by the audit committee. Employees to
the auditors are also approved by the committee. The financial statements of corporations and
firms are reviewed by these external auditors. Once they carry out a review on the statements,
they give their opinion on the nature of the financial statements. The external auditor shouldnt
be changed in a corporation as one of the regulations. In case the auditor is be changed, the

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committee must approve the change and approve the new auditor. The auditors opinion is
important and their opinion helps streamline the preparation of financial statements to avoid
misrepresentation and misappropriation or wrong statements. There should be no influence in the
preparation of audits by whosever. Any influence on the audit renders the audit report
misleading. Any disagreements between the management and the auditor should be discussed by
the committee. The committee in choosing the auditor, it ensures that the editor is independent.
An independent auditors opinion on the accuracy of the prepared financial statements is likely to
be a sincere one and it likely to be void of bias or exaggeration (Shakespeare, 2008).
Every corporation should also have a code of ethics. This code of ethics regulates how
employees and the general workforce in a firm conduct themselves as they conduct their daily
activities. This code of ethics clearly stipulates measures the consequences that one might go
through if they break the code of ethics. The code of ethics is used to streamline as well as ensure
that the behaviors of all stakeholders in a firm are in line with the firms objectives and goals.
Employees who are morally upright even in their conduct are not likely to engage in crude
practices or swindle the general public. The ethics of senior financial officers should also be
clearly stipulated. Any change in the code of ethics should also be stated clearly and the
committee notified on the same. The code of ethics in the corporation should promote and foster
honesty, fairness and accuracy in the standards of accounting applied and subsequently, be in
line with the laws of the existing government (Parker, 2000).
A highly confidential means of communication should be established where the
agitations and complains of employees can be channeled to the committee. Any complains on
faults of financial reporting in a firm reported by an employee is taken up seriously and the
committee takes on to carry investigations accordingly.

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A firm should report to the audit committee in appropriate time to be applied in the
preparation of financial statements. In any case the handling and preparation of financial
statements in the firm or corporation is to be conducted or alternative accounting standards are
to be applied, the audit committee should be informed prior to their application. The suspected or
estimated outcome or result of applying the alternative accounting standards should also be
assessed and given account of.
The audit committee which has the mandate of creating controls in a firm or corporation
has a right to engage advice from advisors on the necessary and appropriate actions and reactions
if necessary in carrying out its duties. This is in order to ensure that any actions by the committee
are in line with any stipulated laws in the state. It also ensures that any action taken by the
committee is fair and is not biased in way (Brian, 2012).
The corporate should bear full responsibility for the financial reports prepared. The final
report should therefore be keenly and closely reviewed by the officer who was involved in
mandating its signing. Since the officer should have reviewed it carefully, the report is therefore
expected to have no false statements in it. The signing officers maintain internal controls in the
corporation and therefore their integrity is paramount and they should not mislead people. The
signing officer also ensures that they include in their report any adjustments made in the internal
controls in the corporation.
In an attempt to protect investors and the fraud and the public from misleading
information by a corporation, regulations required by the corporation on preparation of financial
statements should be strictly followed and adhered to. The committee should take action in case

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the regulations are not followed. This therefore means that the financial report is misleading if
the set regulations arent are not adhered to.
Adherence to these standards and regulations by the audit committee is meant to ensure
transparency in the audit reports by companies and corporations. They ensure that accounting
standards are followed in preparing financial statements. This subsequently protects the general
public from fraud and from being swindled by corporations. The regulations put in place should
be enforced without discrimination and seen to take effect and protect the public from these
officials who mainly are up to satisfying self-interests.

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References

Brian, C. (2012). How Sarbanes-Oxley Has Affected Internal Controls and Compliance. Global
Association of Risk Professionals , 1-4.
Kohn, S. (2004). Whistleblower Law: A Guide to Legal Legal Protection of Corporate
Employees. Westport: Praeger.
Parker, S. (2000). Audit committee characteristics and auditor selection. Journal of Practice and
Theory , 47-66.
Shakespeare, C. (2008). 'Sarbanes-Oxley Act of 2002 Five Years on. Journal of Business Law ,
333.