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SOX: Accuracy of Financial Statements

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The Sarbanes-Oxley Act (SOX) signed into law in July 2002 was intended to improve the accuracy of the financial statements prepared by publicly held companies. Carefully read the summary of this Act.

QUESTION: If you believe that legislation can guarantee the accuracy of public company financial statements, explain why previous laws have failed. If you believe that the reverse is true, please explain why CEOs and CFOs are paying so much attention to this law.

The response should be about 3 pages (double spaced, font size 12, times new roman)

Helpful information provided as attachments.

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I believe that legislation can guarantee the accuracy of public company financial statements. Technically no legislation can guarantee absolute accuracy of public company financial statements but legislation can increase the accuracy of public company financial statements substantially. This is what has happened is that the Sarbanes Oxley Act 2002 has substantially increased the accuracy of financial statements.

Previous laws have failed because these laws had severe deficiencies. Before the Sarbanes Oxley Act, the public company external auditor and company management developed friendly relationships by providing multiple services, such as consultancy for public companies. The external auditor in return for these favors overlooked discrepancies in financial reporting. Even though SEC guidelines existed relating to auditor independence, before Sarbanes Oxley Act, these were not enforced rigorously. Prior to the act, there were several permissible accounting practices which were used to manipulate the revenues and earnings of the company(1). The SOX put an end to these questionable corporate practices. The CEOs and CFOs are paying so much attention to Sarbanes Oxley Act because this law requires the CFO and the CEO to make certification in annual and quarterly reports. if there is a misstatement, a restatement has to be prepared and the CEO and the CFO has to reimburse the company for any ...

Solution Summary

The answer to this problem explains the impact of Sarbanes Oxley Act on the accuracy of financial statements of public companies. The references related to the answer are also included.