Tax Advantage and Disadvantage of Sarbanes-Oxley

Pros and cons of Sarbanes Oxley Act

Sarbanes-Oxley Act of the United State was passed in year 20002 and it brought in
significant reform in the financial reporting standards in the country. The main idea formulated
in the Act was to develop a way that would have reinstated the public confidence in public
companies management after the famous scandals in WorldCom and Enron (Tackett, Wolf &
Claypool, 2004). The Act had a direct influence to the liabilities and the level of responsibilities
of the company board of directors, auditors, corporate executives, audit committees and
company analysts. This paper tends to explore and provide the merits and demerits of Sarbanes-
Oxley Act mainly in relation to tax planning.
Concerning the issue of tax planning, Sarbanes-Oxley Act has capacity to highlight the
potential risks of similar firms to conduct tax services and auditing of the company by ensuring
that it changes the association between the company Audit Committee and the company External
Auditors (Vakkur, McAfee & Kipperman, 2010). The Act has been able to offer a provision
covering the new obligations on such type of services that require pre-approval or approval by
the company Audit Committee. The Committee is expected to enforce both the Audit committee
and the company tax department. With respect to retaining and appointing the company auditors,
this is considered as a question for the company audit committee. In this situation, auditors have
the capacity to offer tax service to the firm. However, the Final Rules of Security Exchange
Commission specify that the Audit Committee needs to analyze:
 All transactions that have been suggested by the firm accountant
 Any transaction that has the only purpose of ensuring that business evade taxes and,

3TAX ADVANTAGE AND DISADVANTAGE OF SARBANES-OXLEY
 Treatment of tax for that it may not be assisted by the Internal Revenue Code of the
United States and other related rules and regulations
It is good to note that, these three tests are as well applicable to the states, locals, foreign
and federal taxes. In addition, another advantage of Sarbanes Oxley Act is that, the corporate
department of tax gained capacity to carry out significant functions (Wilkins, 2004). These
functions are directed toward supporting the audit committee toward ensuring that they meet the
responsibilities of Sarbanes Oxley in relation to the tax purposes. However, it is advisable to the
company Vice President of Tax or the Director of Tax to have a copy of auditing policy of the
company and be familiar with the provisions offered as well as the procedure set to attain
permission in case the services are not approved earlier to this process (Redner, 2002).
The main demerit that is associated with Sarbanes Oxley Act is in relation to the process
of adhering to the demand from the business and implementing the number of distinct internal
controls and protects the firm financial information. The aspect of internal control is applicable
to every aspect of operation in accounting. For example, accounting issues that are related to
cash reconciliations, fixed assets and accounts payable (Riotto, 2008). Various distinct internal
controls measures need to have an exact time for processing of all accounting functions and this
tend to be the main reason of delaying timely preparation of firm financial statements. In
addition, firm employees are expected to confirm further that all the documented information is
true, correct, and approved by the senior executives. Increasing the function and operation of
internal control measure in firms will increase the closing time for preparing the tax files hence
delaying the preparation of the firm financial statements (Linck, Netter & Yang, 2009).
As well, Sarbanes Oxley Act has been requiring public corporation to ensure they have a year
audit that need to be performed by an independent auditing firm. The numbered of audits that are

4TAX ADVANTAGE AND DISADVANTAGE OF SARBANES-OXLEY
conducted increase the cost level of the business hence increasing the accounting and auditing
fees from the firm to ensure it fix the budget with an aim to compensate for the services. There
have been severe fines related to accounting and tax has been increased in the Sarbanes Oxley
Act. Few penalties are placed on some minor issues of violating the Act. There are rigorous
fines that deal with minor mistakes and violation may hinder the executive type of certain talent
group in case the employees of future management are not intended to be liable for any minor
mistake done (Dalton & Dalton, 2008).
Opinion
Sarbanes Oxley act has been successful especially when it comes to the requirements of
managing a public company. the company CEO and the CFO are required to take personal
responsibility of a company by ensuring that they personally certify the quarterly and the annual
financial statements and its disclosures. The Act has been able to restore investor confidence in
public company operations that was the main purpose of setting and introducing the regulation.
As well, I have believes that it has successfully emphasized on the impact controls that are held
in organizations mainly the IT related controls.

5TAX ADVANTAGE AND DISADVANTAGE OF SARBANES-OXLEY

References:

Dalton, D. R., & Dalton, C. M. (2008). Corporate governance in the post Sarbanes–Oxley period:
Compensation disclosure and analysis (CD&A). Business Horizons, 51(2), 85-92.
Linck, J. S., Netter, J. M., & Yang, T. (2009). The effects and unintended consequences of the
Sarbanes-Oxley Act on the supply and demand for directors. Review of Financial Studies,
22(8), 3287-3328.
Redner, S. J. (2002). Thinking of Going Public-Think Twice, Then Read the Sarbanes-Oxley Act
of 2002. J. Small & Emerging Bus. L., 6, 521.
Riotto, J. J. (2008). Understanding the Sarbanes-Oxley Act—A valued added approach for public
interest. Critical Perspectives on Accounting, 19(7), 952-962.
Tackett, J., Wolf, F., & Claypool, G. (2004). Sarbanes-Oxley and audit failure: A critical
examination. Managerial Auditing Journal, 19(3), 340-350.
Vakkur, N. V., McAfee, R. P., & Kipperman, F. (2010). The unintended effects of the
Sarbanes–Oxley Act of 2002. Research in Accounting Regulation, 22(1), 18-28.
Wilkins, J. B. (2004). Sarbanes-Oxley Act of 2002: The Ripple Effects of Restoring Shareholder
Confidence, The. S. Ill. ULJ, 29, 339.

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