Sarbanes Oxley | Course Paper

Running head: Sarbanes-Oxley Act (SOX) and its impact on GAAP

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Understanding the Sarbanes-Oxley Act (SOX) and its impact on

Generally Accepted Accounting Principles (GAAP)

Pappim Stevenson

Accounting Theory & Practice (BUSN5600)

BJC Cohort 14B

Webster University

Instructor: Jacque James, CFE, MAFM

Spring 2019

Sarbanes-Oxley Act (SOX) and its impact on GAAP

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Abstract

After the collapse of prestigious financial institutions in 2001, Congress passed the

Sarbanes-Oxley Act in 2002 to enhance corporate governance in an attempt to restore public

confidence. This research paper is to understand the rules and enforcement policies outlined in

the Sarbanes-Oxley Act of 2002 amended or supplemented existing laws dealing with security

regulation, including the Securities Exchange Act of 1934 and other laws enforced by the

Securities and Exchange Commission (SEC). The new law set out reforms and additions in four

principal areas and to discuss the origin and background of the Sarbanes-Oxley Act (SOX) and

how it was achieved with an aim to improve accountability in the financial reporting process of

all public companies. Also, the paper will discuss the impact of SOX on the Generally Accepted

Accounting Principles (GAAP)

Keywords: Sarbanes-Oxley Act, Generally Accepted Accounting Principles, SOX, GAPP

Securities and Exchange Commission, SEC

Sarbanes-Oxley Act (SOX) and its impact on GAAP

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Sarbanes-Oxley Act (SOX)

Introduction

The Sarbanes Oxley (SOX) act was signed into law in 2002 by Former U.S. President

George W. Bush. The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping

auditing and financial regulations for public companies as a way to strengthen confidence in the

integrity of corporate disclosures and financial reporting. Former U.S. President George W.

Bush, who signed the act into law on July 30, 2002, called the act “the most far-reaching reforms

of American business practices since the time of Franklin Delano Roosevelt.” (Rouse, 2018)

One direct effect of the Sarbanes Oxley Act on corporate governance is the strengthening

of public companies audit committees. The audit committee receives wide leverage in overseeing

the top management’s accounting decisions. The audit committee members must be independent

of management, and gain new responsibilities such as approving numerous audit and non-audit

services, selecting and overseeing external auditors, and handling complaints regarding the

management’s accounting practices.

The Sarbanes-Oxley Act changes management’s responsibility for financial reporting

significantly. The act requires that top managers personally certify the accuracy of financial

reports. If a top manager knowingly or willfully makes a false certification, he can face 10 to 20

years in prison. If the company is forced to make a required accounting restatement due to

management’s misconduct, top managers can be required to give up their bonuses or profits made

from selling the company’s stock. If the director or officer is convicted of a securities law

violation, he can be prohibited from serving in the same role at the public company.

Sarbanes-Oxley Act (SOX) and its impact on GAAP

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Background

Multiple instances of questionable financial practices in large U.S. companies and accounting

firms in the late 1990s and early 2000s precipitated the creation of Sarbanes Oxley. Revelations of

corporate financial misconduct culminated with the bankruptcy of Enron. As one of the top-ten largest

corporations in the U.S. at the time, Enron managed a diversified portfolio of oil and gas development,

energy sales, and telecommunications. However, undisclosed partnerships hid failing aspects of the

company — this allowed earnings to be overstated, which generated increased stock prices.

Enron employee pension funds and individual 401Ks were heavily invested in Enron stock.

When the company failed, millions of investors found their stock portfolios devalued and depleted. In

the case of Enron, reallocations to other stock choices were unavailable during the time when the stock