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 ...
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...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.
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