The second title establishes the standards that will ensure the independence of external auditors so as to minimize the risk of conflict of interest. This title also puts up new auditors approval qualifications, partner rotation and reporting requirements. One of the notable features of this second title is that it bars audit firms from providing non-audit services for same clients (Einhorn 19). The responsibility for accuracy and completeness of financial records is placed on senior executives.
This third title further defines how the external auditors will be expected to interact with the audit committees. A quarterly certification of the integrity of the financial reports by the corporate executives is required by this title (Einhorn 19). The fourth sections requires the inclusion of off balance sheet transactions and transactions of corporate officers. This is to ensure enhanced financial reporting and ensure accountability at the highest levels of corporate leadership. The fourth title further requires the placement of internal controls that will ensure the accuracy of the financial reports.
Timely reporting in case of change in financial conditions which must also be accompanied by a review of SEC or its agents, is advocated for by this title. The fifth section includes measures that are aimed at restoring the confidence of the investors on the reports brought forward by securities analysts (Einhorn 77). The code of behavior for the security analysts are defined in this section and they are further required to disclose any conflict of interest that may be in their knowledge.
The sixth section is closely related to the fifth as it defines practices that will help in the restoration of investor confidence. The SEC's authority is also defined in this chapter and their power to bar securities professionals from dealing is brought into proper perspectives by definition of cases where their power is applicable (Einhorn 22). The seventh section places more emphasis on the manner in which research that is aimed at enforcing actions against violators will be conducted.
The reports and reasons that have been identified as being of importance in the research include the effects of consolidation on accounting firms, securities violation, role of credit rating agencies and enforcement actions. This chapter further suggested investigations on whether the investment banks played a role in obfuscating the financial positions of some of the corporations that failed. The eighth title describes the specific penalties for fraud by either manipulating, destroying or altering financial records.
This title further defines the penalties associated with interfering with the course of investigation while providing a considerable level of protection for whistle blowers. The ninth title increase the penalties associated with white collar crimes and conspiracies to commit financial crimes. One of the key recommendations of the title is that stronger punishments should be provided for financial crime offenders. A key addition is that failure to certify corporate records is declared a criminal offense (Einhorn 19).
The chief executive officer or the senior most corporate officer is required to certify and sign the company's tax returns in the tenth title. The definition of corporate fraud as a crime within the law is found in the eleventh title. Record tampering is also included as a criminal offense and the specific penalties are also defined in this section. Sentencing guidelines are revised in this chapter and the penalties are made harsher. SEC is also given the power to freeze large or suspect payments (Einhorn 18).
There are a number of factors that led to the adoption of the rather controversial measures towards ensuring disclosure and accuracy of financial records. Prior to the implementation of the SOX the auditing firms were self regulated (McAlevey 45). There was considerable levels of conflict interest as they were involved with companies in more than one way. They were therefore not in a position to challenge the companies on financial matters for it may have led to poor work relations in other areas they were involved in.
Audit committees were also blamed for the crisis that led to the development of the SOX as they did not perform their responsibility as investor representatives with maximum efficiency (McAlevey 56). A number of causes for failure and collapse of some of the corporations were in the line of negligence of duty and lack of the required expertise in handling business complexities. Management also had a considerable degree on audit committees and thus the integrity of their reports was questionable even before they were presented.
The SEC was underfunded before the American public realized its importance to the overall development of the economy. The federal allocations to this programs have since doubled as a way of ensuring that they effectively deal with issues and threats to the financial stability of public corporations. Securities analysts had multiple roles that presented a conflict of interest (Niskanen 123). The security analysts could make recommendations on whether to sell or buy and at the same time provide financial assistance for companies who are in need of financial assistance.