Accounting Information Systems: The Processes and Controls, 2nd Edition

THE SARBANES–OXLEY ACT OF 2002 (STUDY OBJECTIVE 5)

The Sarbanes–Oxley Act was signed into law on July 30, 2002, for the purpose of improving financial reporting and reinforcing the importance of corporate ethics. The legislation was enacted in an effort to curb the corruption and accounting blunders that had been recently discovered in connection with the bankruptcies of such corporate giants as Enron and WorldCom. In these cases, many Americans suffered tremendously as the values of stock prices and employee retirement plans plunged. It became apparent that change was needed to improve investor faith in America's financial reporting systems.

The Sarbanes–Oxley Act (“the Act”) applies to public companies and the auditors of public companies. In order to carry out the provisions of the Act, the Public Company Accounting Oversight Board (PCAOB) was established. The PCAOB comprises five members who are appointed by the SEC. The PCAOB governs the work of auditors of public companies by providing standards related to quality controls. The PCAOB has investigative and disciplinary authority over the performance of public accounting firms.

The Act includes 11 “titles,” or categories of provisions. Each title includes several sections. Exhibit 5-2 summarizes the titles and certain key sections within each title. The sections identified in the exhibit are discussed in detail in this chapter because of their relevance to corporate governance and other topics within this text.

Exhibit 5-2 ...