Sarbanes-Oxley Act: Enhancing Corporate Governance

Introduction

Sarbanes-Oxley act was passed in 2002 in reaction to several scandals and the dot com bubble involving major corporations. Eron, Tyco and Worldcom were the prime scandals. In the light of those scandals, Sarbanes- Oxley was passed with an intention to make corporate governance more rigorous, protect investors from fraudulent activities performed by the corporation by making financial practises more transparent, strengthen corporate oversight and promote/improve internal corporate control. In short it was meant to enhance corporate governance and restore faith in investors.

Sarbanes-Oxley act 2002 was a central piece of security legislation since foundation of SEC (Securities and Exchange Commission) 1934. It is divided into eleven

Section 802

This section takes into consideration penalties for any violations of the Sarbanes-Oxley act. The section imposes heavy fines or time spent in jail for those who neglect or misuse any of the reforms mentioned in the act.

With section 802 we can clearly see that Sarbanes-Oxley act not only provide directions for corporations on how to ethically run a business but also enforces penalties to prevent any unethical/misconduct.

Pros And Cons Of Sarbanes-Oxley Act 2004

After carefully reading the case provided to us in class, I formulated a question that will be the main focus in determining the pros and cons of Sarbanes-Oxley.

Question

It been 14 years since the act was passed, why are the parties still not used to the effectiveness of the act as its initial intention was meant for the greater good? In other words, why haven’t the corporations/managements been able to see Sarbanes-Oxley as an ally after over a decade?

Pros

Disclosure Of Critical Information To

For example, Enron will built a power plant and claim a projected profit for it on the books even though no money was made from it. Later when the figure for revenues arrived, they would be less than the projected amount earlier. That loss was taken/recorded on an off-the-books corporation - hiding the initial loss.

By that, Enron tricked shareholder’s in believing that the company was doing better than expected as the bottom-line was unaffected (by the loss occurred) and projected a healthy profit. To avoid this from happening again Sarbanes-Oxley act requires a full disclosure of critical information, assets, liabilities, risk profiles and, other financial and non-financial information that may affect investing decisions of shareholders.

Lay Emphasis On The Need For Internal Control

In order to mitigate management override (such as in the Enron case), Section 404 was put to action in the act. Under the section requirements, management is to quarterly test internal controls. Internal checks should ensure that:

• The transactions are carried out the way they should be

• The checks and balances are the way they r supposed to