The Sarbanes Oxley Act (Sox) of 2002 is the United States Federal law that sets enhanced standards for all U.S public company boards, management and public accounting firms. It was initially set in reaction to the corporate and accounting scandals that when the share prices of the companies collapsed shaking the confidence in the nation’s security market.
There are many benefits of the Sarbanes Oxley Act. First, it restores the public confidence in the financial reporting. It ensures that there is reliable financial data and, therefore, the public confidence in the financial reporting. Section 404 achieves this by annually inquiring into the issues and files with the security and exchange commission to get a management internal controlling report.
It established a standard that ensures that every organization runs at a well defined standard hence the uniformity in the processes and management. It led to the improvement in the mandatory filers, hence improving the access to the public debt market by reducing the agency problems of the complying firms.
However, with the milestone achieved it is still unclear whether the series of mandatory reforms are achieving its goals. The SOX needs to incorporate for more risks such as the catastrophic bearing. This could be done by allowing investors to diversify stocks and investments and thus efficiently manage risks. The section 404 requirements may improve efficiently for some firms while negatively affecting others. The section fosters a negative impact as it provides an opportunity cost with the compliance. It also has a negative impact on the financial reporting process and auditing timeline. The positive impact on compliance increases with increase in the company size.
The SOX has a negative impact on the liquidity of the company’s common stock, indirect benefits and loses the investors’ confidence in the company. Fraud detection and capital raisings are also an issue that is greatly affected.