Compare And Contrast The Views Of Management And Accountants

Compare and contrast the views of management and accountants regarding the changes required by the Sarbanes-Oxley Act on internal controls and how these changes have affected corporations, accounting firms, and investors

Write a word project on the following topic: Compare and contrast the views of management and accountants regarding the changes required by the Sarbanes-Oxley Act on internal controls and how these changes have affected corporations, accounting firms, and investors. Your project must be formatted according to APA 6th edition guidelines, and you need to use at least one external reference. Save your file as "LastnameFirstinitial-ACCT105-7." Submit your work by midnight ET on Day 7 (Sunday).

Paper For Above instruction

The Sarbanes-Oxley Act (SOX), enacted in 2002 in response to prominent corporate scandals such as Enron and WorldCom, fundamentally transformed the landscape of corporate governance and internal controls. Its primary objective was to enhance transparency, accountability, and accuracy in financial reporting. However, the implementation of SOX elicited diverse responses from different stakeholders, particularly management and accountants, regarding the extent and implications of these regulatory changes. This paper compares and contrasts the views of management and accountants concerning the required changes, and analyzes how these perceptions have influenced corporations, accounting firms, and investors.

Management’s Perspective on SOX and Internal Controls

Management’s reaction to the Sarbanes-Oxley Act has been largely pragmatic but also somewhat apprehensive. Many executives and corporate managers viewed the stringent requirements as necessary reforms to restore public trust in financial markets (Cohen, Dey, & Lys, 2008). Nevertheless, management often perceived the compliance process as burdensome, costly, and time-consuming. Implementing internal controls mandated by SOX, especially Section 404 which requires management to assess and report on internal control effectiveness, represented a significant operational challenge for many organizations.

Executives argue that SOX improvements in internal controls bolster corporate integrity and reduce the risk of fraud, yet they also cite increased administrative and compliance costs as a burden that detracts from core business activities. Small and medium-sized enterprises expressed particular concern over the disproportionate costs relative to their revenue sizes. Therefore, management’s stance balances recognition of the importance of robust controls with concerns over regulatory burdens and financial strain.

Accountants’ Perspective on SOX and Internal Controls

Accountants, especially those in internal and external audit functions, generally viewed SOX as a necessary evolution in corporate accountability frameworks. They emphasized that enhanced internal controls provide more accurate financial reporting and improve investor confidence (Srinivasan & Thomas, 2004). External auditors, in particular, saw their roles expanded to include attesting to management’s internal control assessments, which increased their responsibilities and workload.

Many accountants appreciated that SOX standardized financial disclosures and introduced rigorous testing and evaluation procedures. However, they also faced challenges as they adapted to new auditing standards, including increased documentation requirements and more extensive testing of controls. While most acknowledged the long-term benefits, initial phases of implementation were often met with skepticism, resourcing issues, and concerns about audit independence and objectivity.

Impact on Corporations

Corporations experienced significant changes following SOX compliance. Internally, they had to overhaul existing control environments, establish new procedures, and invest heavily in IT systems and training. These changes led to increased operational costs and resource allocation but also resulted in improved risk management practices. Transparency increased, which in turn helped restore investor confidence, especially among institutional investors wary of previous scandals.

However, some corporations viewed SOX compliance as a financial and managerial burden that constrained agility and innovation. Large firms, with more resources, adapted more readily than smaller entities, which struggled with the costs associated with compliance (Xu, 2014). Overall, the law shifted the corporate culture towards greater accountability, albeit at the expense of increased bureaucracy.

Impact on Accounting Firms

Accounting firms experienced a surge in demand for audit and consulting services related to SOX compliance. They played a pivotal role in helping organizations design internal control frameworks and prepare documentation for audits (Messier, Glover, & Prawitt, 2017). This expansion increased revenue streams for these firms but also exposed them to higher litigation and regulatory scrutiny regarding their auditing practices.

Firms had to invest in training auditors on new standards and controls methodologies, which improved audit quality over time. Nonetheless, the emphasis on control testing also raised concerns about auditors’ independence, as they became more involved in clients’ internal processes.

Impact on Investors

Investors generally viewed SOX as a positive development, as increased transparency and stronger internal controls contributed to more reliable financial data. The act reduced the possibility of fraud, providing more confidence in share prices and investment decisions (Eubanks & McAllister, 2018). However, increased compliance costs often translated into higher audit fees, which some investors debated whether they added value or merely increased corporate expenses.

Overall, the perception of SOX among investors improved governance standards and mitigated risk, thereby fostering a more stable investment environment.

Conclusion

The Sarbanes-Oxley Act introduced comprehensive reforms that reshaped corporate governance and financial oversight. While management viewed it as a necessary yet burdensome regulation, accountants generally recognized its value in promoting transparency and accountability. The law’s implementation engendered significant operational changes within corporations and consulting firms, while ultimately enhancing investor confidence. Despite some drawbacks related to costs and compliance, SOX has broadly contributed to establishing a more trustworthy financial reporting environment.

As corporate governance continues to evolve, the lessons learned from SOX implementation will inform future regulatory frameworks aimed at strengthening the integrity of financial markets.

References

• Cohen, J., Dey, A., & Lys, T. (2008). Real and Proposed Regulatory Reforms in Corporate Governance. Journal of Accounting and Economics, 46(2-3), 188-204.
• Eubanks, D. L., & McAllister, K. B. (2018). The Impact of the Sarbanes-Oxley Act on Corporate Governance and Financial Reporting. Accounting Horizons, 32(4), 61-75.
• Messier, W. F., Glover, S. M., & Prawitt, D. F. (2017). Auditing & Assurance Services (11th ed.). McGraw-Hill Education.
• Srinivasan, N., & Thomas, K. R. (2004). The Sarbanes-Oxley Act of 2002: Effects on the Accounting Profession. Journal of Accounting Literature, 23, 1-48.
• XU, Y. (2014). Small Business and the Sarbanes-Oxley Act: Challenges and Opportunities. Journal of Business Ethics, 120(4), 595-607.