INTRODUCTION
The Sarbanes Oxley Act was signed in 2002 in July with the aim of gaining back the lost public confidence on corporate financial statements. Before the enactment of this act, the investors of corporations were facing tremendous loss in trust after watching constant episodes of financial manipulations and misrepresentations. Some also suffered substantial losses. More specifically, SOX (the Sarbanes Oxley Act) was intended to counter the issues of accounting fraud by increasing the reliability of the disclosures of the financial information. After a series of accounting scandals which caused the collapse of big corporations like Enron and WorldCom, the public disgust raised concerns about the reliability and accuracy of the financial statements and its disclosures (Vaughan and Arsneault 45). It led to the creation of SOX act. As per the records reported, investors lost a total estimated amount of $900 Billion as a result of the accounting scandals from the period of 1997 to 2004.
The SOX is one of the most significant acts regarding financial legislation. Its enactment has dramatically changed the landscape for the corporations. The effects are particularly pronounced in the areas of auditing, financial reporting, and the accounting industry. The changes made are effective indeed, but it has come along with great costs as well (Hanna).
The Act has caused significant changes in the financial legislature. The changes are broadly explained as;
- The creation of the Public Accounting Oversight Board, which has the legislative authority to practice discipline for any violators of the SOX.
- The audit companies are now prohibited from providing bookkeeping, designing of accounting information system, actuarial, and managerial consulting services of such company whose audit has to be provided as well. It enables in reducing of the conflict of interests.
- Requiring the CEO and CFO of the corporations to personally certify and take responsibility for the published financial statements and disclosures.
- All material off-balance sheet transactions are to be disclosed. Transactions involving management and stockholders are to be disclosed.
- Making the management responsible for stating the current assessment of the company’s internal control system, and its effectiveness.
These measures have reaped many benefits for the corporations. These are:
RELIABILITY OF THE FINANCIAL INFORMATION
The main aim behind this effort was to restore the faith of the investors on published annual statements of the corporations. The main of any firm’s internal control is to publish the financial information which is accurate and reliable. Better internal controls support the publishing of more reliable financial information. The requirement of effective internal controls as per the SOX enables the firms to publish reliable financial information (Hanna).
STRONG CORPORATE GOVERNANCE
Strong corporate governance is needed for corporations provide disciplined workplace and tacit structure to the employees. The inclusion of ethical and moral values and promoting of honest business culture gives rise to better performance of the lower management.
REDUCTION OF FRAUD
It has also been another major objective behind the enactment of the SOX. For large corporations like Enron and WorldCom, the scale of financial manipulation and fraud is also large. It results in greater financial losses. The confidence of the investor in the market is crucial for its growth. With the enactment of SOX, reduction in the financial frauds has been noticed.
IMPROVED LIQUIDITY
It is shown through different research and studies that the implementation of SOX was associated with the liquidity of the market. With increased disclosures, the market becomes more liquid due to the reduction in information asymmetry (Jahmani and Dowling 63).
The disadvantages, on the other hand, are:
Paranoia of Transparency
The SOX was formed in response to the outcry of the strong needs for internal controls raised by investors after losing billions to financial frauds. The need for more control consequently leads to more bureaucracy.
Excess Paperwork and High Costs
Some also argue that through the implementation of SOX, there is only numerous productions of extensive and expensive paper after long documentation processes. The costs associated with the implementation of SOX are also very high as compared to their benefits.
Strict Legislations
It is also argued that as the implementation of SOX is very difficult, there are more possibilities of escaping these regulations. Thus, imposing strict and more legislation is not considered an effective way to handle this. Furthermore, SOX is more relying on outside pressures rather than inside motivation to make the internal controls effective. This approach can be ineffective. Thus, the incorporation of ethical and moral values needs as a priority (Hanna).
CONCLUSION
Concluding this, it can be said that, no doubt, the first year of implementation of SOX has been costly and painful. However, the corporations have managed to learn how not only navigate through these daunting regulations, but also use these regulations for their business improvement. Companies have reported that during the implementation process of the SOX act, companies can learn and adapt and can reduce the cost of implementing. The ongoing costs of compliance, on the other hand, has a declining trend as the employees become more knowledgeable of the compliance process. Furthermore, companies are also finding ways in which they can reduce their indirect costs of implementation through the use of simplification as well as automation. Thus, it can be said that though it is clearly very tiring and painful process to comply with SOX, it has its benefits.
Work Cited
Hanna, Julia. “The Costs And Benefits Of Sarbanes-Oxley.” Forbes. Forbes, 10 March 2014. Web. 16 February 2018. https://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/#33c2e2ac478c.
Jahmani, Yousef and William A. Dowling. “The Impact Of Sarbanes-Oxley Act.” Journal of Business & Economics Research 6.10 (2008): 57-66.
Vaughan, Shannon K. and Shelly Arsneault. Managing Nonprofit Organizations in a Policy World. CQ Press, 2013.
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