Assessing the Effectiveness of the Sarbanes-Oxley Act By Negus Rudison-Imhotep, Ph.D
Dr. Negus Rudison-Imhotep | Contributor on topics related to memory and memory building
The Sarbanes-Oxley Act of 2002 was constructed to protect investors by fostering the true sense of precision, accountability, and transparency of corporate divulgences according to sureties’ ordinances, as well as for other intentions. In this paradigm, an assessment will be made on how applicable the present legal code is for all participants in the Securities Exchange Commission.
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The Sarbanes-Oxley Act offers a diversity of forethoughts concerning business ethics. According to Orin et al. 2008, p. 161, this act is an exceptional initiative to ensure that the accounting catastrophe of our most recent past will not be duplicated.
SOX Act pressurized deception as a federal crime and increased white-collar crime punishments. Innovative obligations are also deposited on corporate management and a new surveillance board was created for accountants.
A brief historical summary of the Sarbanes-Oxley Enactment
In 2001, Enron filed for bankruptcy and their accounting firm was found guilty of obstruction of justice. Stocks plunged at record rates, and investors’ inquiries on the validity, and the general self-assurance in the market distrusted.
“The Act constituted a daring effort to legislate morality, intending to restore integrity to the public confidence in the financial market” (Orin, 2008, p. 142). Venture capitalists questioned if there was a resemblance of veracity amongst investment bankers. Congressional leaders were impelled to engender legislation to rectify this imperative financial dilemma.
Senator Paul S. Sarbanes from the state of Maryland, and Michael Oxley republican from the state of Ohio were the main architects of this act. The official title, the Public Company Accounting Reform and Investor Protection Act dispenses a clear and concise illustration of the purpose of this legal code.
The key ethical components of the Sarbanes-Oxley Act
Regulations were implemented to ensure the appropriate measures were taken to record ethical accounting practices.
Title I through Title XI are compliance sections that were established for the securitization of the shareholders: In section 302, both the Chief Executive Officer and Chief Financial Officer are the validation officials who must make a truthful appraisal and report of all internal records.
“Section 302 requires that the signing officers “have presented in the report their conclusion about the effectiveness of their internal controls based on their evaluation as of the date” (U.S. House of Representatives, Committee on Financial Services 2002) (Hermanson, 2009, p.250).
Pecuniary statements and associated statistics should distinctly represent the accurate condition of the internal audit, if there are discrepancies they must be listed within the ninety-day grace period.
According to Hermanson et al. 2009, p. 267, a faction of augmented filers imparted a primary caveat under section 302 of internal control deficiencies that were consequently mentioned in oppositional preliminary section 404 accounts.
Fraud amongst executive leadership and accountants is a source of inappropriate conduct, also external/internal forces predicate on numerous occasions the unethical behavior that the SOX legislation was created for.
“In summary, the fundamental attribution error is more likely to occur for theft than financial statement fraud because of the perceived intent for personal gain involved with theft and the presence of salient external pressures for financial statement fraud, which carries the relatively salient possibility that organization benefits (through any such benefit is likely short-term), increasing the likelihood that observers attribute financial fraud to contextual pressures” (Robinson, 2012, p.216).
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Social responsibility implications regarding the mandatory publication of corporate ethics being cognizant of regulations disseminates a well-defined understanding of the standard operational procedures of an organization.
According to Orin et al. 2008, p. 161, the Sarbanes-Oxley Act, and Code of Ethics requisites have grasped the attention of the stakeholders, and business administrators’ precise guidelines have taken root in the business world, yet improvements are compulsory. Transparency is a key element when addressing corporate social responsibility, while ethics in business to many is an oxymoron.
Obligatory publication of business moral principles is attainable, but wrongdoers seek to find loopholes for their inappropriate behaviors. “Numerous reported corporate and accounting scandals, business failures of high-profile companies, falling investor confidence in the capital markets, substantial losses by investors, and perceived inadequate market-based correction mechanisms persuaded Congress to pass SOX” (Jain, 2008, p. 380).
Investors and the public query, if there is any truthfulness in the corporate realm, to publish a code of ethics within the Public Company Accounting Reform and Investor Protection Act/SOX, a beam of light in an opaque commercial marketplace.
According to Jain, 2008, p. 380, the Security Exchange Commission and the Sarbanes-Oxley Act enactment rubrics were produced with the objectives of refining the consistency of public finance statistics and rebuilding shareholders’ assurance in pecuniary statements and the investment market.
The Sarbanes-Oxley Act (SOX) is a legislative measure enacted by Congress to mitigate substantial skepticism among market participants. Fraud is an unsettling experience; fraud probability can and ought to be administrated.
Is there an unfair burden on smaller organizations due to SOX?
Smaller firms have recorded complaints that SOX section 404 dispenses an inequitable onus to their agencies due to their size. According to Michelman, 2008, p. 30-31, Internal Control over Financial Report—and utilized.
Disproportionate regulatory rates per employee for smaller establishments are extremely rigorous in comparison to larger firms. Guidance for Smaller Public Companies (ICFR-SPC) is inclined to have confidence in that (ICFR-SPC) proposes imposing functionality to diminutive companies, only if they appropriately comprehend It is a well-known fact that there is no deficiency in opponents of the Sarbanes-Oxley Act. “Most of them focus heavily, if not exclusively, on the out-of-pocket costs of compliance, which they posit is an unfair burden for American businesses” (Orin, 2008, p.143).
Yet, apprehending fraud risk policies and being conscious of the appropriate methodology when implementing these regulations is an asset for businesses and their clientele. “Unfortunately, too many organizations develop internal controls but never re-examine them as the organization changes” (Michelman, 2008, p. 34).
Too often innovative reforms are met with opposition due to the unknown, erudite revisions to the existing directives to develop proponents for these ethical accounting techniques.
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According to Michelman, 2008, p. 34, the (ICFR-SPC) possesses the precise policies needed to flourish, small CPA firms who cannot envision the advantages of this charter overlook an occasion to magnify their praxis.
In an age of digitalization of communication, accounting firms not acquainted with the germane methodology with SOX and the SEC are not noteworthy to process appraising reputable agency financial statements.
Improving SOX Legislation
The Jumpstart Our Business Starts Act (JOBS Act) attempts to place limitations on SOX section 404 (b). The Obama Administration views this Act as a positive step towards easing the most stringent corporate governance regulations on small businesses.
Yet this 2012, legislative (JOBS Act) has been labeled a “tragedy just waiting to happen” by Senator Paul S. Sarbanes. “Since government regulation of corporate governance is necessary for even voluntary corporate governance to be effective, and SOX section 404 (b) was a government regulation that improved corporate governance, it is a mistake for JOBS Act section 103, to essentially eliminate outside-audit requirement and disregards its benefits” (Townsend, 2014, p. 918).
The external and internal auditors need positive reforms. Audit Committees have been meaningfully reinforced in the function of autonomous audit committees in corporate governance.
Reference
Hermanson, D. R. (2009). Why Do Some Accelerated Filers with SOX Section 404 Material Weaknesses Provide Early Warning under Section 302? Auditing, 247-271.
Jain, P. K.-C. (2008). The Sarbanes-Oxley Act of 2002 and Mark Liquidity. Financial Review, 361-382.
Michelman, J. E. (2008). Improving Internal Control Over Financial Reporting. CPA Journal, 30-34. Orin, R. M. (2008). Ethical Guidance and Constraint Under Sarbanes-Oxley Act Journal of Accounting, Auditing & Finance, 141-171.
Robinson, S. R. (2012). The Effects of Contextual and Wrongdoing Attributes on Organizational Employees’ Whistleblowing Intentions Following Fraud. Journal Of Business Ethics, 213-227.
Townsend, S. (2014). The Jumpstart Our Business Startups Act Takes the Bite Out of Sarbanes-Oxley: Adding Corporate Governance to the Discussion. Iowa Law Review, 893-918.
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