Sarbanes Oxley Act (SOX) Disclosure, Internal Control Disclosure as an Important Part in Corporate Governance (CG)

Abstract

The Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745, enacted July 30, 2002), also known as the "Public Company Accounting Reform and Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability, Responsibility, and Transparency Act" (in the House) and more commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or expanded requirements for all U.S. public company boards, management and public accounting firms. There are also a number of provisions of the Act that also apply to privately held companies, for example the willful destruction of evidence to impede a Federal investigation. The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron and WorldCom. The sections of the bill cover responsibilities of a public corporation’s board of directors, adds criminal penalties for certain misconduct, and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law.After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act was enacted in July 2002 to restore investors' confidence in markets and close loopholes for public companies to defraud investors. The act had a profound effect on corporate governance in the United States. The Sarbanes-Oxley Act requires public companies to strengthen audit committees, perform internal controls tests, set personal liability of directors and officers for accuracy of financial statements, and strengthen disclosure. The Sarbanes-Oxley Act also establishes stricter criminal penalties for securities fraud and changes how public accounting firms operate their businesses. Internal control is a process conducted by the company’s board of management, the management, and other personal designed (1) to give certainty about the effectiveness and efficiency of the company’s operation, (2) the reliability of financial statements, and (3) the obedience towards the law and regulations (Ghosh & Lubber ink, 2006).The internal control is also needed in generating the financial report so that it reflects the company’s real operation. The assurance of the effectiveness of the company’s internal control is an obligation for the company which stock is traded at the capital market. An effective internal control system will benefit the company, especially to attract the market. (Shaun & Weiss, 2009). This is a theoretical study based on SOX disclosure and the effect of internal controls on executive compensation according to the theoretical standards as an important part of corporate governance (CG).

Keywords: The internal control disclosure, financial report, executive compensation, timeliness, corporate governance, control system, the responsibility, risk management, evaluate the effectiveness.