Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER FOUR

The Sarbanes-Oxley Act

PASSED WITH LIGHTNING SPEED by a Congress determined to “do something” about accounting fraud, the Sarbanes-Oxley Act of 2002 at first blush may come across as a thrown-together hodgepodge of hastily devised, sometimes redundant, and often conflicting financial reporting ­concepts. It may seem hard otherwise to explain, for example, a single statute that imposes ostensibly redundant certification requirements on executives, puts in place an accountant regulatory system that is largely duplicative of the SEC, makes certain accounting misstatements more punishable than some forms of murder, and commissions any number of academic studies to pave the way for still more laws and regulations in the future.

That is certainly one way of looking at it. No doubt, some statutory subsections of Sarbanes-Oxley are tough to figure out. Still, there is another way of looking at it. That begins with the recognition that the objective of Sarbanes-Oxley was not so much to create a brand-new system of financial reporting but to bring together a number of preexisting financial reporting concepts that shared as their common foundation a singular understanding of why financial reporting systems fail. If Sarbanes-Oxley comes across as something of a hodgepodge, that's because it is. It is not, however, a hodgepodge of entirely new or unrelated ideas. It is an attempt to pull together into one statutory scheme a number of practical devices, born of common experience ...