Sarbanes Oxley Act And Its Effect On Businesses

The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act and the Auditing Accountability and Responsibility Act, was signed into law on July 30, 2002, by President George W. Bush as a direct response to the corporate financial scandals of Enron, WorldCom, and Tyco International (Arens & Elders, 2006; King & Case, 2014;Rezaee & Crumbley, 2007). Fraudulent financial activities and substantial audit failures like those of Arthur Andersen and Ernst and Young had destroyed public trust and investor confidence in the accounting profession. The debilitating consequences of these perpetrators and their crimes summoned a massive effort by the government and the accounting profession to fight all forms of corruption through regulatory, legal, auditing, and accounting changes.

SOX enactment is an act that was formulated as a result of corporate scandals from Enron, WorldCom, Adelphia, and Tyco. However, Congress succumbed to pressure from the public for the government to take action about the unethical behavior of company executives of publicly –traded companies. Thus, the Sarbanes-Oxley (SOX) was to restore the integrity and public confidence in financial markets. During these scandals, there were flagrant disregard to Generally Accepted Accounting Practices (GAAP). For example, according to Washington Post (2005), WorldCom

The Sarbanes-Oxley is a U.S. federal law that has generated much controversy, and involved the response to the financial scandals of some large corporations such as Enron, Tyco International, WorldCom and Peregrine Systems. These scandals brought down the public confidence in auditing and accounting firms. The law is named after Senator Paul Sarbanes Democratic Party and GOP Congressman Michael G. Oxley. It was passed by large majorities in both Congress and the Senate and covers and sets new performance standards for boards of directors and managers of companies and accounting mechanisms of all publicly traded companies in America. It also introduces criminal liability for the board of directors and a requirement by

In a recent article in the New York Times, Sarbanes-Oxley, Bemoaned as a Burden, Is an Investor’s Ally, by Gretchen Morgenson, is about some challenging the requirements that were put in place and the cost to the company’s. According to Morgenson, Tom Farley is one that is an outspoken critic of the law requiring outside auditor to attest on the management’s internal controls on the financial statements. He attributes the decline in corporations in the Unites States.

The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law, and for other purposes. (Lander, 2004) The Act created new standards for public companies and accounting firms to abide by. After multiple business failures due to fraudulent activities and embezzlement at companies such as Enron Sarbanes and Oxley recognized a need for the revamping of our financial systems laws, rules and regulations. Thus, the Sarbanes-Oxley Act was born.

The Sarbanes-Oxley Act of 2002, also known as SOX in short, is a U.S. Federal Law passed by President George Bush. The main reason behind passing of the law was that the government needed improved regulations mandating upper management to confirm the reliability and transparency of the financial statements. This bill came about because of the failure and malpractice by companies such as Enron, WorldCom, Adelphia, and Arthur Anderson. These companies caused a major scandal where investors lost billions of dollars resulting in the public losing confidence in the U.S. Securities Market. “The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the Public Company Accounting Oversight Board, also known as the PCAOB.”[1] The act includes 11 sections that are enforced by the Securities and Exchange Commission.

The Sarbanes-Oxley Act was passes in 2002 in response to a handful of large corporate scandals that occurred between the years 2000 to 2002, resulting in the losses of billions of dollars by investors. Enron, Worldcom and Tyco are probably the most well known companies that were involved in these scandals, but there were a number of other companies guilty of such things as well. The Sarbanes-Oxley Act was passed as a way to crackdown on corporations by setting new and improved standards that all United States’ public companies and accounting firms were and are required to abide by. It also works to hold top level executives accountable for the company, and if fraudulent behaviors are discovered then the executives could find themselves in hot water. The punishments for such fraudulence could be as serious as 20 years jail time. (Sarbanes-Oxley Act, 2014). The primary motivation for the act was to prevent future scandals from happening, or at least, make it much more difficult for them to happen. The act was also passed largely to protect the people—the shareholders—from corporations, their executives, and their boards of directors. Critics tend to argue that the act is to complicated, and costs to much to abide by, leading to the United States losing its “competitive edge” in the global marketplace (Sarbanes-Oxley Act, 2014). The Sarbanes-Oxley act, like most things, has its pros and cons. It is costly; studies have shown that this act has cost companies millions of

Senator Paul Sarbanes and Representative Michael Oxley created the act to keep businesses from producing false financial documents just to get investors to invest into the company because it appears that the business is doing very well. Companies like Enron under this new act couldn’t produce the false accounting statements without first having an auditor coming in and checking over the inventories or book keeping data. Now investors can relax a little more and not worry that the financial statements are falsified or are generalized and rounded up to make the company look good. Investors can trust that the auditors are doing their job and verifying the books and data for those companies.

SOX is an important law toward achievements, but for companies that are not set-up to provide that, it can be costly.

While researching whether or not The Sarbanes–Oxley Act of 2002 (SOX) was the correct decision at the time, there was no lack of information to be found. There are thousands of conflicting articles on both sides of the isle. My thought is, although it has brought to light the need for a higher ethical standard within the accounting industry, to task the government the job of regulating morality simply does not work.

In late 2001, some individuals were noticing accounting irregularities with a specific publicly traded company. This is when investors started looking closely into the financial records of large corporations. Enron was one of these corporations. The combination of events such as these created an opportunity for a change and therefore the Sarbanes-Oxley Act was introduced to Congress.

A recent study by Xue Wang (Emory University) tackles how SOX has affected the compensation and turnover rates of CFOs.   They play a critical role in developing firms’ financial reporting and making voluntary disclosure decisions.   Moreover, CFOs are ultimately responsible for the quality of internal control systems.   The study provides some important insights about the impact of SOX on the executive labor market.   It shows that requiring more disclosure of information about a firm’s internal controls provides some positive benefits with respect to corporate governance, in this case making it easier for boards to monitor the activities of CFOs.   In comparing and contrasting firms with strong internal controls received an increase in salary, bonus, and total compensation in the post-SOX time periods.   In contrast, CFOs of corporations reporting a problem with their internal controls incurred a significant reduction in their compensation packages.   With respect to CFO turnover, Wang did find that CFO turnover rates generally increased form the pre- to post-SOX period.

On July 30, 2002, the Sarbanes Oxley Act (also known as SOX) was signed into law by President George W. Bush. The Sarbanes Oxley Act of 2002 is a federal law that set new or improved standards for all U.S. public company boards, management and public accounting firms. Covered in the eleven titles are additional corporate board responsibilities, auditing requirements and criminal penalties. This essay reviews the implications of the Sarbanes Oxley Act on the accounting profession.

The Sarbanes-Oxley Act, enacted as a reaction to the WorldCom, Enron, and other corporate scandals, improved the regulatory protections presented to U.S. investors by adding an audit committee requirement, intensification of auditor independence, increasing disclosure requirements, prohibiting loans to executives, adding a certification requirement, and strengthening criminal and civil penalties for violations of securities laws.

The much needed blowup was offered by the massive scandals at Enron and Worldcom followed by Adelphia and the rest. In their efforts to restore investors’ confidence in the capital market, the United States’ Congress enacted Sarbanes-Oxley Act in 2002 (SOX). The SOX had ambitious goals to fix the root cause of the failures in corporate America, accountabilities in the boardrooms (Grasso, Tilley, & White, 2009: Kessel, 2011). In particular, the Act ensures that accounting records and reports are fairly presented and reliable (Verschoor, 2012: Aubert & Grudnitski, 2013). SOX achieves these by requiring certifications by the Chief Executive Officers (CEO) and the Chief Financial Officers (CFO). In addition, attestations by independent auditors of accuracies of the financial reports and internal controls over the accounting records.