Positive And Negative Effects Of The Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) was ratified on July 30, 2002 (Shaw and Terando,177). This act came after the financial crises during the early 2000’s. According to Bolton, following these corporate scandals in the early 2000’s, the government took a hard look at the different regulations on companies and how we can prevent what happened from happening again. Thus, came the Sarbanes-Oxley Act. SOX was created to decrease corporate fraud. This act especially looked at the role of accounting in corporations and thus also formed the Public Company Accounting Oversight Board (PCAOB) to supervise the accounting industry. The Sarbanes-Oxley Act also strengthened the independence of corporate boards (Bolton, 83). All of this regulation is imperative in the effect that SOX has today on corporations. The regulations that SOX requires and the cost of implementing them has a large impact on the managers’ and auditors’ incentives to follow SOX, thereby lessening the

Professors at the University of Connecticut and Texas A&M, Weber, Wu, and Rice have collected evidence and have published it as research pointing to the negative effect that the Sarbanes-Oxley Act has on public enforcement mechanisms (Rice, Weber, and Wu, 1169). Rice, Weber, and Wu examined various penalties that could, for the Sarbanes-Oxley Act Section 404, serve as enforcement mechanisms. These academics focused on centered their research on firms that have beforehand stated their control weaknesses as mandatory that have restatements plus other firms that only acknowledged their weaknesses after announcing their restatement (Rice, Weber, and Wu, 1169). Their studies show that for firms that had previously reported weaknesses and then announced a restatement, class action lawsuits, management turnover, and auditor turnover were all the more likely (Rice, Weber, and Wu,