The Enron fiasco tore through the market destroying investor confidence. Impressed by the growth of the energy industry, Enron took advantage of accounting practices to deceive the public about its own financial standing. The presence of Arthur Andersen was no guarantee that frauds and malpractices are not possible with a big Enron machinery. Both firms collapsed. The Enron scandal brought Congress to pass the Sarbanes & Oxley Act. It introduced initiatives to strengthen financial reporting and disclosure requirements in the midst of the scandal hoping to bring back investor trust in the market.
The Act established the Public Company Accounting Oversight Board (PCAOB) to oversee audit and monitor compliance with the provisions of the Act. All audit firms are expected to register with the Board to assure quality audit and imposes sanction for violations. The Act requires a seven-year audit records retention, peer-review of engagements, annual and special audits; registration of foreign audit firms and disallowing firms to provide non-audit services to the same client. The Audit Committee was strengthened with at least a member having financial expertise.
Rotation of audit partners is now done every three years. Ethics among executives were imposed. In addition, management must provide reports on the appropriateness of the financial statements, disclosures and provisions against insider trading and company lawyers must report material violations of securities laws, help strengthen disclosure functions especially of off-balance sheet items and any form of relationship with unincorporated entities. An internal control report issued by management under the Act is expected to strengthen investor confidence, among others.
On the overall, the Sarbanes and Oxley Act is one single assurance for the investing public to bring their trust back to the stock market. Faithful compliance of corporate executives will further enhance the trust and confidence of the investing public in the stock market.
List of References
http://thecaq. aicpa. org/Resources/Sarbanes+Oxley/Summary+of+the+Provisions+of+the+Sarbanes-Oxley+Act+of+2002. htm (accessed May 7, 2008) http://www. valuebasedmanagement. net/organizations_sarbanes. html (accessed May 7m 2008) Shaw, John C. 2003. Corporate Governance & Risk: A Systems Approach, 61-82, John Wiley & Sons, New Jersey.