The Impact of the Sarbanes-Oxley Act on Auditing and Accounting
THE IMPACT OF THE SARBANES-OXLEY ACT
An Auditing Issue Impacted By the Sarbanes-Oxley Act
One of the main auditing issues that were affected by the Sarbanes-Oxley act was the “Repo 105.” This clause allowed the company to maneuver accounting principles and a company can show a short-term loan as a part of their sale. It was a repurchase agreement, which allowed a company to reduce its leverage level temporarily by reducing the company liabilities for a short period, and allow the company to reflect lowered level of debts in its financial statements. After the financial reports of the company are made public, the company can take some loan and repurchase its assets. This allowed the company to create a false picture about its financial condition in its financial reports at the time of issuing financial statements.
Comparison of the Issue before and after the Sarbanes Oxley act
Before the application of Sarbanes Oxley act, the companies had the leisure to use the auditing loophole of repo 105 and improve the financial condition of the company for a while, and do not report this in their financial reports. Lehman brothers used this tool to project a positive image about them in the market for about 2 years and then finally they had to face bankruptcy. After the application of Sarbanes Oxley act, the companies are now bound to disclose all off-balance sheet related materials, i.e. the transactions, arrangements, and obligations. The company has to disclose details of relationship with any entity or person that can have an impact on the financial condition, changes in the financial health, operations of the company, expenditures, resources, revenues, etc. (www.soxlaw.com)