Governance and Sarbanes-Oxley Act:
A few corporate scams that took place in the late 1990s and the early 2000s increased the need for organizations to follow corporate governance norms. Prominent among these scams was the one involving Enron Corporation, a Texas, US-based natural gas, energy trading, and electric utilities company. This financial debacle was the result of the irregular accounting procedures adopted by Enron's accounting firm Arthur Andersen LLP. The trial involving Arthur Andersen exposed another accounting fraud at WorldCom Inc., a telecommunication company, which later went bankrupt along with Enron. A number of other companies in the US were found to have indulged in fraudulent accounting practices along with high-level corruption and insider trading. In response to this, the US government passed the Sarbanes-Oxley Act (SOX) in 2002. This Act focused on protecting investors from the fraudulent accounting practices of companies. It also played a vital role in the development of IT governance. Some of the important points of the Act were:
- It required all public companies to be registered with the established Public Company Accounting Oversight Board. The Board consisted of five full-time members who looked after the audits and auditors of public sector companies.
- It increased the corporate responsibility for any fraudulent deeds.
- It awarded strict punishments for deeds such as destroying records, committing frauds, and concealing them.
- It prohibited an auditor from being the primary auditor for more than five consecutive years.
- It required the CEO and CFO to certify the financial reports.
- Each member of the audit committee had to be either a member of the board of directors or independent.
- All the financial reports were to be filed with the Securities and Exchange Commission.
Under Section 802 (a) of the SOX Act, organizations were required to store all records related to an audit for at least five years. Under Section 802 (a), punishments were awarded to any person found to have altered, destroyed, or concealed data, which resulted in failure to comply with the defined accounting principles. To comply with such rules of the SOX Act, it was important to have correct information in the hands of the related chief financial officer (CFO) of the organization. Manually storing and maintaining the data for five years was a difficult task and thus a need arose for an efficient IT system that could store a huge amount of data for any period of time.
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