Introduction In July of 2002, Congress swiftly passed the Public Company Accounting Reform and Investors Protection Act at the time when corporations like Arthur Anderson, Enron and WorldCom fell due to fraudulent accounting practices and bad internal control. This bill, sponsored by Mike Oxley (R-OH) and Paul Sarbanes (D-MD), became known as Sarbanes-Oxley Act (SOX).It sought to restore public confidence in publicly traded companies and their accounting practices, though the companies listed above were prosecuted on laws that were already in place before SOX. Many studies have examined the effects of SOX on corporations in the past eleven years. The benefits are hard to quantify and the cost are rather hard to estimate including the effect on market efficiency. Critics argue that SOX was passed too quickly without sufficient data to support its effectiveness in curbing the moral hazard behaviors that led to the downfall of these big corporations, causing investors to lose their savings and confidence in the market. This paper will try to answer whether the benefits outweigh the costs of implementing this law. It also analyze whether it has been effective in curbing moral hazard behaviors and improving the efficiency of capital markets while protecting shareholder rights. Finally, it will suggest of improvements can be applied or has it been effective in its role in curbing fraudulent activities while promoting a more efficient market. SOX: An Overview SOX at its core was meant to increase the disclosure requirements of publicly traded firms. In addition, SOX increased the role of independent directors in corporate governance, expanded the liability of officers and directors, required companies to assess and disclose the adequacy ... ... middle of paper ... ...9, 1520; 28 U.S.C. §§ 994, 1658; 29 U.S.C. §§ 1021, 1131-32, P.L. 107-204 Dey, A. (2010). The Chilling Effect of Sarbanes-Oxley: A Discussion of Sarbanes-Oxley and Corporate Risk-Taking. Journal of Accounting And Economics, 49(1-2), 53-57. doi:http://proxy.ulib.csuohio.edu:2279/10.1016/j.jacceco.2009.06.003 Kim, J. (2011). Time-Series Analysis of Going-Private Transactions: Before and after the Sarbanes-Oxley Act. In J. W. Kensinger (Ed.), Research in Finance (pp. 1-83). Research in Finance series, vol. 27. Bingley, U.K.: Emerald. Siegel, P. H., Franz, D. P., & O'Shaughnessy, J. (January 01, 2010). The Sarbanes-Oxley Act: A Cost-Benefit Analysis Using The U.S. Banking Industry. Journal of Applied Business Research, 26, 1.) Zhang, I. X. (September 01, 2007). Economic consequences of the Sarbanes-Oxley Act of 2002. Journal of Accounting and Economics, 44, 74-115.
A Guide to the Sarbanes-Oxley Act of 2002 (2006). Retrieved December 16, 2009 from www.soxlaw.com
Since they are financial legislation, Sarbanes-Oxley Act and Dodd-Frank Act have strong relationship with the modern financial markets. This relationship is mainly attributed to the implications that the acts have on market participants, regulators, investors, and markets in general. These acts primarily focus on promoting the health and vitality of financial markets by addressing several practices that could have considerable negative effects on market participants and the economy in general. Actually, Dodd-Frank, which is arguably the most important financial legislation in modern economy, brought significant changes that contributed to changes in th...
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents after finding out Enron Company was going to be audited. The exorbitant amounts of money auditors get paid to hide audit discrepancies was also beyond belief. The article went on to explain many companies hire relatives or friends to do their audits, resulting in fraud, money embezzlement, corruption and even the demise of companies. Resulting in the public losing faith in the accounting profession, the Sarbanes-Oxley Act passed in 2002 by congress was designed to restrict what company owners and auditors can and cannot do. From what I gathered in the article, ever since the implementation of the Sarbanes- Oxley Act there has been somewhat of an improvement but questions are still being asked as to why there are still issues that are not being targeted in hopes of preventing more audit failures. The article also talked about four common causes of audit failure: unintentional auditor mistakes, fraud, fatigue and auditor client relationships. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct clearly states an independent auditor because it produces a credible audit, however, when there is conflict of interest, the relation of a former employer, or a relative or even the fear of getting fire...
Eckbo and Masulis (1992) open their paper by explaining the decline in rights issues and the surge in firm commitments. To show this Eckbo and Masulis use a sample of 1,249 equity offers between 1963-1981.
A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Sarbanes-Oxley (SOX) was enacted in 2002 as an anti-fraud measure in the wake of large accounting scandals such as Enron and WorldCom. Until recently, the Securities and Exchange Commission (SEC) applied the same SOX auditing practices to all companies, regardless of their size, infrastructure, level of risk, or available resources. As long as it was publicly traded, whether the market cap was less than $75 million or more than $100 billion, the same auditing rules and standards applied for all companies.
Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to the collapse of Enron. It is based on the belief that regulation of corporate governance must be law based rather through discretionary codes. In effect, this Act is based on the agency theory which addresses the agency dilemma. By-law of Aeropostale Inc. (effective July 1,
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
(SOX). This specific act requires management of the company “to assess both the design and
There has been a drive towards corporate governance which has been driven by a greater need for shareholder protection. If investors feel well cushioned then there is a higher chance that t...