The Sarbanes-Oxley act was passed by the 2002 congress that set standards for financial reports. Sarbanes-Oxley act was developed after the collapse of the Enron and WorldCom which made the government and other interested parties to take an action needed to taken so as to prevent such an event to occur again in the future. It sought to address the relationship between the auditors and corporations, come up with a new structure the system of auditing of public corporations, and check on the relationship of the executives in relation to company accounting statements.

Section One of the Act

The establishment of the accounting oversight board which in conjunction with the SEC check on the performance of public auditors (Garrison & Noreen, 48). The inspection by these two firms is purely intended to build the confidence of investors whenever they use the reports by these auditors with an interest of investing. Investors use financial reports to determine the best places for investment. In setting the standards, the board helped in building the confidence of the investors once more and the investors could once more trust the statements by these auditors (Lara, 1). The public could also trust the reports that have been prepared by these auditors. Violators of the developed act can be punished by the board using the penalties that have been laid down and depends on the severity of the individual’s action. The work of the board is to develop auditing standards and the penalties that are associated with breakage in one of the standards.


Section Two of the Act

The functions of the auditors and the relationship between the auditors and their clients are defined in the second section of the act (John, 4). Basically, there exists not a single relationship between the clients and the auditors. Some of the auditors’ functions that the second section outlines include bookkeeping services, actuarial services, services related to human resource, etc. Rotations of audit partners, independence of the executive officers, and the reporting procedures for the accounting firm are also specified in this section.

Section Three of the Act

In this section, the corporate responsibility is defined. Here, the audit committees for the public company are created whereby the members of these committees are not allowed to take any form of payment given to them when they are not serving the board (Lara, 1). The members are authorized to always carry some accuracy statements together with their financial statements as a means of proving that the statements are always accurate. The audit committee created here gives the federal courts the mandate to penalize any member who attempts to influence financial statements in an illegal manner.

Section Four of the Act

In this section, the internal audit procedures and disclosures are detailed. This section curtails the executives from taking any loans and puts a limit on the disclosure of information. The requirements of an internal control report are also specified which include management responsibility to establish some internal structures for preparation and reporting of financial statements and the presence of an assessment showing the effectiveness of the reports that have been created in that financial year.



The Sarbanes-Oxley act was very essential in building the confidence of investors who had lost their trust in the financial reports from public corporations. In effect section one of the act is dedicated in defining some principles that were to help in building the confidence of the investors. Section two defines the functions of the auditors and their relationships with the clients. In sections three and four, the internal audit procedures are developed and the corporate responsibilities are defined.


Lara, B. (2005). The Sarbanes-Oxley Act of 2002 and its Effects on American Business. Retrieved on 25-Sep-2009 from y.pdf.

John, M. (2006). Sarbanes-Oxley Act of 2002. London: McMillan Publishers, 02-08.

Garrison, H. R & Noreen, E. W. (2009). Managerial Accounting. Greenfield, 46-54.