Elaboration of Problem & Sarbanes Oxley Act

The SOX was enacted in response to the multiple accounting frauds and scandals and the need to tighten accounting and disclosure regulations. However the ambit of the act and its various requirements appeared to be extremely complex and time consuming and at that point of time imposed substantial accounting work and load on the management of all publicly listed companies.

Comford (2007) states as follows: The Sarbanes-Oxley Act is proving to be a huge distraction for company executives as they struggle to ascertain the impact of its requirements and meet the corresponding deadlines for compliance. While much of the act addresses issues of corporate governance and audit requirements, some of the sections have implications that will affect the way a company does business.

With the SOX dealing with a number of accounting, disclosure and regulatory issues, company managements and accounting departments found that disclosure norms required them to pay significant attention to issues that had until then been grossly neglected (Weili and McVay, 2005, 137). One of these was the issue of chargebacks, a sales process that enables companies to reduce the final sales prices of its products or customers to levy financial penalties for non compliance of supply terms (Ge and McVay, 2005, 137).

Whilst prima facie a simple process, chargeback accounting has over time become extremely complex because of the enormous amount of transactions in which companies engage, and the numerous distributors and customers they service (Ge and McVay, 2005, 137). Whilst companies prior to the enactment of the SOX used to adopt rather rudimentary accounting procedures to account for chargebacks, the new disclosure requirements of the SOX made it obligatory for them to take up the complex and muddled issue in far greater detail, placing enormous loads on the working of accounting and finance departments.