Human Resource Aspects of the Sarbanes-Oxley Act

By Larson, Gregory M.; Thompson, James H. et al. | Journal of Legal, Ethical and Regulatory Issues, January-July 2004 | Go to article overview

Human Resource Aspects of the Sarbanes-Oxley Act


Larson, Gregory M., Thompson, James H., Walters, Bruce, Journal of Legal, Ethical and Regulatory Issues


ABSTRACT

In an attempt to bolster public confidence in the accounting profession, the Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002, by President George W. Bush. The Act, which many consider the most significant change to securities law since the Securities and Exchange Act of 1934, fundamentally changes the way that public enterprises conduct business and how the accounting profession performs audits.

Although this law has attracted significant public attention for its new accounting requirements, a number of provisions of this Act directly affect the employer-employee relationship. Human resource management plays a vital role in aligning individual goals with organizational goals, yet these issues have gone relatively unnoticed. Human resource dimensions of the Sarbanes-Oxley Act include protection for whistleblowers; requirements to develop, clarify, and implement codes of ethics; increased fines and penalties for unethical actions; greater efforts to ensure independence in fact and appearance; restrictions involving compensation programs; increased fiduciary responsibilities; and employment provisions. This paper identifies and discusses these aspects of the Act.

INTRODUCTION

The startling and recent scandals in the stock market have generated significant losses to investors and, for a time, they left the American economy in virtual chaos. In today's market, trust does not seem to be prudent. From financial statements and market analysts to politicians and company executives, enough evidence of impropriety has surfaced recently to raise investor skepticism for years to come. At the forefront of this problem are concerns regarding the ethical behavior of business enterprises and the effectiveness of accounting and auditing standards.

In an attempt to bolster public confidence in the accounting profession, the Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002, by President George W. Bush. The Act, which many consider the most significant change to securities law since the Securities and Exchange Act of 1934, creates a Public Company Accounting Oversight Board (PCAOB) and fundamentally changes the way that public enterprises conduct business and how the accounting profession performs audits. The increased costs and regulations for public companies have likely contributed to the sharp rise in firms going private since Sarbanes-Oxley was enacted (Freeman & Zambrowiez, 2002).

Although this law has attracted significant public attention for its new accounting requirements, a number of provisions of this Act directly affect the employer-employee relationship. Although human resource management plays a vital role in aligning individual goals with organizational goals, these human resource (HR) issues have gone relatively unnoticed. The purpose of this paper is to identify and discuss the HR aspects of the Sarbanes-Oxley Act.

THE SARBANES-OXLEY ACT

The accounting profession has lobbied fervently to continue its history of self-regulation. However, cases involving illusive accounting practices and audit failure have led Congress to create legislation that challenges the profession's ability to do so. The Sarbanes-Oxley Act, so named because of its introduction by Senator Paul S. Sarbanes and House Representative Michael G. Oxley, was intended by Congress to address the perceived systemic and structural weaknesses affecting financial reporting practices. Specifically, the Act is intended to improve the accuracy and reliability of corporate disclosures that are made pursuant to the U.S. federal securities laws, hold corporate managers responsible for such disclosures, and provide transparency in financial reporting in independent audits of public companies (107th Congress, 2002). The provisions of this Act apply only to public companies and public accounting firms that prepare or issue audit reports for public companies (Akin, Gump, Strauss, Hauer, & Feld, 2002). …

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