The Sarbanes-Oxley Act of 2002 is a federal law that aimed at holding the corporate management of public companies accountable for the financial reports that their companies gave to the stakeholders. The Act is considered one of its kinds in the United States since the passage of the Securities Act of 1933. It aimed at ensuring that the financial reports that public companies released to the companies were a true representation of the actual financial standings in the company. Among the notable provisions of the Act was the establishment of the Public Company Accounting Oversight Board that has the authority to supervise, regularize, survey and chasten accounting companies in their positions as accountants of public organizations. The law was necessitated by the corporate crisis because of scandalous presentation of financial reports in the United States, which was climaxed by the incidences at Enron, Tyco, WorldCom, and other high-profile corporations. The US Congress sought for a way of restoring the confidence of investors in the financial markets through responsible corporate governance systems. This paper discusses whether the Sarbanes-Oxley Act is successful in achieving what it set out to do in 2002 (Zameeruddin 3).
The SOX Act, commonly referred to as Sarbanes-Oxley Act, can be said to have received differing results in terms of success and failure. As noted by Hostak et al. (6), one of the initial effect of Sarbanes-Oxley was the closing of domicile foreign companies from the US financial market. Such companies migrated either to their home markets or other accommodating markets elsewhere. In essence, these companies found it difficult and costly to comply with the requirements of the Sarbanes-Oxley Act. Hostak et al. (7) further argues that this is a failure on the part of Sarbanes-Oxley because the law allowed such companies to continue to trade as public companies elsewhere, where the financial laws were even weaker compared to the previously existing ones in the USA.
This meant that the problem Sarbanes-Oxley sought to fix was simply transferred to other countries without considering the integration of financial markets across the world. The failure of the Sarbanes-Oxley lies, therefore, in its inability to prevent non-compliant companies that choose to operate from elsewhere to influence the financial performances in the financial markets of the US. The regulation did not have provisions that restricted public companies in the US from trading with other public companies from outside the country that were suspected in malpractices in their corporate and financial management. Besides, Sweeney (4) argues that Sarbanes-Oxley simply helped in spreading the problem of poor financial and corporate management in public companies across the world as over a hundred of public listed companies immigrated to other countries.
Similarly, Benner (2) argues that Sarbanes-Oxley has failed to instill the discipline and regulate the activities of many publicly traded companies in the US. In a way, some of these companies have identified the loopholes in the law and used them to make illegal money. An example is the Lehman Brothers that recently got closed after it was revealed that the company used unprofessional methods known as Repo 105 to get illegal profits. What the company did was to pretend to be selling securities at a profit and, therefore, making the firm’s finances look rosy at the end of each quarter. The Lehman Brothers would then borrow to repurchase the securities and repeat the process as many times as possible. This is a fraud and should not be accepted.
Irrespective of these failures, Sarbanes-Oxley has experienced significant successes, especially in the way it has established controls and regulations in the financial markets. Hostak et al. (10) in their study on the effect of Sarbanes-Oxley found that the law had tremendously increased the level of corporate transparency in publicly listed companies. While comparing the performance of Sarbanes-Oxley compliant companies with those that moved to less regulated markets, Coenen (2) argued for importance of Sarbanes-Oxley. He argued that Sarbanes-Oxley was instrumental in ensuring that the companies in the US became more accountable and responsible for corporate governance and financial reporting in their boardroom even as the directors and other stakeholders searched for best practices tools in the management of their corporations. As such, the law has enabled more corporations to embrace transparency through measured dispersion and accurate forecasting of earnings by financial analysts.
Similarly, Verschoor (4) argued that Sarbanes-Oxley provided more avenues in which corporations could increase their borrowing capacity by lowering the costs of borrowing through careful internal control measures. The law stimulated the improvement in internal control measures and financial statements by requiring corporate management to comply with the various provisions as envisaged in the law. Failure to comply would attract criminal and civil prosecution. Thus, the provisions in the law have been vital in ensuring that companies that wished to continue to operate in the New York Stock Exchange complied through improvement of management and controlling the performance of their companies in the business.
In addition, Sarbanes-Oxley is responsible for the return of corporate management to the boardroom. Before the enactment of the law, corporate management was almost a one-man’s show where the chief executive officer would make groundbreaking decisions on behalf of the entire corporation regardless of whether the CEO had personal interest in such matters (Hostak et al. 7). Sarbanes-Oxley has encouraged the collaboration of all corporate stakeholders in making corporate decisions and, therefore, provided responsible and accountable decisions in boardroom meetings. Moreover, the law has helped to define the focus of law enforcers and other financial regulators regarding proper application of financial duty laws.
Sarbanes-Oxley is also responsible for raising the level of public interest and consciousness in matters that concern corporate governance. As such, there are more checks and balances in the financial market and corporate governance. The checks and balances are instrumental in avoiding corporate misconduct from directors and company auditors, whether internal or external (Benner 2). Furthermore, the success of Sarbanes-Oxley is also evident in the way corporate management has assigned premium on the corporate focus on the issues of responsible management, focusing on the preservation of corporate reputation and enhanced awareness of risks facing the corporation. Additionally, Sarbanes-Oxley Act has enabled the management of public corporations to be more active, engaged and informed on every matter that remotely affects the company.
Furthermore, the Sarbanes-Oxley law is responsible for the increased and more enhanced roles that corporate internal auditors are undertaking in many corporations. Currently, internal auditors are becoming a regular phenomenon in the corporate management terms of auditing a company’s risks and controls (Hostak et al. 4). Arguably, the activities of an informed and sensitized internal audit team will add more value to an organization. This is by identifying discrepancies that would have been otherwise costly to the company. In the same spirit, Sarbanes-Oxley law has brought about a resuscitation of the board of directors through a much more enhanced role that they are supposed to play in the management of their corporation, thus becoming more engaged, especially in terms of controlling and governing the corporate business (Coenen 3).
Moreover, the Sarbanes-Oxley law has achieved great accolade for helping to stop fraud and fraudulent accounting activities among corporations. Sweeney (2) argues that the law may not have completely stopped the fraud that was happening in the financial management of many public corporations before its enactment in 2002, but ultimately, it has helped to curtail the rate of occurrence of such cases. Sweeney (3) further argues that, if there were no Sarbanes-Oxley law in the US, things could have been worse. However, the law has been blamed for being unable to prevent the global financial crisis and the recession that the US economy witnessed in 2008 and 2009, despite the fact that corporations experienced significant annual expenditure in order to comply with the requirements of that Sarbanes-Oxley law.
Another accomplishment of Sarbanes-Oxley law was in the restoration of transparency on the part of corporate governance in giving information that related to the company’s financial books (Hostak et al. 7). Prior to the enactment of Sarbanes-Oxley law, the corporate management did not feel obligated to give truthful reports to the concerned stakeholders, even as those reports were manipulated to give insiders advantages to engage in illegal trades. The existing law did not provide explicit provisions that were criminalizing or making false reporting an offense that was punishable in a court of law. However, with Sarbanes-Oxley corporate management, internal and external auditors both act with awareness that infringing on the existing law could land someone in prison, make him be fined, or both (Zameeruddin 5). The Sarbanes-Oxley law has also been instrumental in raising the public confidence in the way corporations were managed. This is in spite of the persistent occurrence of lapses in accounting practices, as it occurred with the Lehman Brothers, or even the global financial crisis that was allegedly caused by insider dealing at some of the big corporation in the New York Stock Exchange.
Evidently, Sarbanes-Oxley law is instrumental in ensuring that the investor is protected by requiring all the chief executive officers and the chief financial officers to take individual responsibilities and accountability for all financial disclosures including the related control mechanisms that the corporate is putting in place (Hostak et al. 5). Similarly, Sarbanes-Oxley law is credited for instilling professionalism and engagement in the corporate auditing that has ensured that corporations do not lose money in the hands of unscrupulous dealers inside the companies. Thus, it has established mechanisms that are important in curbing fraud and fraudulent activities in accounting.
As noted byHostak et al. (7), for a public corporation to realize the importance of Sarbanes-Oxley law, the law should be fully implemented. Even though a few public traded companies have gone ahead to conduct full implementation, many are still lagging behind with minimum implementation that cannot deliver on the benefits of the law in controlling the internal auditing and corporate governance as it is supposed to be. Ultimately, the success of Sarbanes-Oxley law will only be realized with full implementation through creation of transparency and diligence in the establishment of internal control systems.
The Sarbanes-Oxley Act of 2002 was legislated by the federal government because of the numerous cases of failures and misconducts in corporate management. The corporate governance was entrusted with the responsibility of self-regulation in protecting the interests of the public investors. However, the corporate governance in some highflying companies had failed to preserve the interests of the public investors. Containing several highly controversial provisions, Sarbanes-Oxley created a total revision of the regulatory structure for the public accounting and auditing profession through provision of guidance aimed at strengthening corporate governance. The Sarbanes-Oxley law is arguably among the best control laws in the financial market that has ever been enacted across the world. Despite the many challenges in the implementation of the law by corporations, the law has been instrumental in establishing best practices in corporate governance and financial reporting by auditors. The advantages of the law are agreeably more than the failures. Looking at the achievements that have been made by Sarbanes-Oxley compliant corporations, a difference can be noted in the way of transparency, accountability, and professionalism that the management of such organizations attaches to their daily routines.