Sarbines Oxley Act - a Solution or a Problem

ECONOMICS REPORT

“SARBINES OXLEY ACT”: A Solution or a Problem

Abstract:Sarbanes Oxley Act has been issued in order to serve the reliability of the financial statements, the trust of the investors, and the stability of the economy. This paper aims to discuss whether Sarbanes-Oxley Act has served positively or negatively the economic stability of the workplace after it was settled as a result of some huge scandals that caused a large impact on the economy ad nations. It will focus on the costs and benefits generated from the act.

SARBINES OXLEY ACT: A Solution or a Problem

It was known that there were big five audit firms which are Price WaterhouseCoopers, Deloitte Touch Tohmatsu, Ernst & Young, KPMG, and Arthur Anderson. However, in 2002 the Anderson firm gave up its licenses and stopped working because it was found guilty of criminal charges as a result of auditing Enron(Lemus, 2014). In 1985, the Enron Corporation was formed by the acquirement and union of two natural gas companies (Lemus, 2014). Enron Corporation started to develop its line of operations and services in different sectors and as a result attained utility plants in Brazil, India, the United States, and most importantly the United Kingdom by captivating benefit of the decontrolled market in the natural gas and electricity industry(Lemus, 2014). “By 2000 the Enron Corporation was the seventh largest corporation by growth revenue in the gas and utility market in the United States territory; however, by October, 2001 the Enron Corporation began to experience financial difficulties which caught investors, who were unaware of Enron’s financial strategy manipulation, by surprise” (Lemus, 2014, p.41).“Consequently, on December 2, 2001 the Enron Corporation decided to file bankruptcy” (Lemus,2014, p.41). “The three major violations under Generally Accepted Accounting Principles  that preceded the fall of the Enron Corporation were; the off-balance sheet arrangements, the role of mark-to-market, and the manipulation of derivatives” (Lemus,2014, p.41). Thus, the fraud caused by Enron, WorldCom, and other fraud caseshave hurt the life of millions of employees and the financial market’s investors There was no trust and confidence considering the market reliability. Hence, the lack of confidence has caused the decrease in investment, diminishing in the market value and stock prices, and surely depressed slowing in the economic growth (Franklin, 2016). “In 2002 the United States Congress passed the Sarbanes-Oxley Act of 2002 to prevent accounting scandals such as Enron, Arthur Andersen, and Tyco” (Lemus, 2014, p.41). Therefore, Sarbanes-Oxley Actwas settled by the government as a protector of the reliability of the financial statements of public corporations but in certain areas it requires extensive efforts and expensive costs in order to comply with.

SOX consists of more than a few sections that straightly limit the relationship and scope of services which auditing firms are able to accomplish for public companies.The main concern of Sarbanes Oxley Act was to raise the independency and transparency over financial reporting. Section 204 commands that the accounting firm reports directly to the company's independent board of directors(Dowling &Jahmani, 2008). Section 302 focuses on the public sector by providing requirements in which both the chief executive officer and the chief financial officer are now required to take personal responsibility of confirming financial statements and disclosures (Dowling &Jahmani, 2008). In addition, “section 401 requires that all material off-balance sheet transactions and relationships with unconsolidated entities, which can or will have economic effects on the company, must be disclosed in the quarterly and annual reports” (Dowling &Jahmani, 2008, p.58). Also, “section 403 requires that any transaction involving management or principal stockholders needs to now be disclosed by the second business day of the transaction” (Dowling &Jahmani, 2008, p.58). However, the most argumentativesection of Sarbanes Oxley Act is section 404. This section obliges the management to prepare a statement in each annual report issued by the company on its accountability for and its current duty of the company's internal control structure and effectiveness(Dowling &Jahmani, 2008). Moreover, section 404entails the auditor to confirm and create valuation of management's report on the company's internal control effectiveness for financial reporting(Dowling &Jahmani, 2008). Section 409 served to significantlydecrease the reporting disclosure timetables on information relating to measurable changes in the company's operations and financial conditions(Dowling &Jahmani, 2008). Furthermore, Sarbanes Oxley Act requires public disclosure of past information that was not previously disclosedin order to mend the accurateness of and the completeness of the disclosure of financial information. In addition, “all registered companies and private corporations who have publicly tradedand registered debt under the Securities Exchange Act, and file reports and non-private offerings under SEC, areobliged to follow the recommendations of Sarbanes Oxley Act”(Dowling &Jahmani, 2008, p.59). Generally, many researchers have proved that Sarbanes Oxley Act has improved the dependability of financial reporting, competence of corporate governance, liquidity in the markets, and has squeezed the chances of frauds.One of the main of purposes of the internal control is to produce trustworthy financial information due to the presence of efficacious internal controls. Also, the major focus of Sarbanes Oxley Act was to boost the safeguarding of valuable internal controls in order to reach trustworthy financial information. Therefore, Sarbanes Oxley Act seems to be a major causative factor in reestablishing public confidence in the reliability of capital markets and supporting reinvesting according to the company’s available financial information(Dowling and Jahmani, 2008). Thus, investors can take advantage of the reliability of the financial reporting and prove their increased confidence by boosting the liquidity in the markets. Also, this act has added strength to the corporate governance. According to Dowling and Jahmani (2008), it “provides discipline for employees and a tacit structure for the company as a whole” (p.62). Hence, “the presence of ethical values and of a business culture of honesty results in better bottom line performance” (Dowling &Jahmani, 2008, p. 62). Consequently, this will lead to a culture of affirmative loyalty and an influential encouraging effect on innovation and creativity in public corporations. Sarbanes Oxley Act impacts more assurance on financial reporting and internal control. Thus, it boosts the autonomy of and number of the board of directors and increases the concentration on regulatory compliance of the whole structure. Generally, the main concern of issuing Sarbanes Oxley Act was to confront financial statement fraud and similar cases of Enron and WorldCom. This confrontation avoids the loss of investors’ trust of the market, the decrease of stock price and market value, and depressed economic growth. Furthermore, there were no significant fraud cases discovered after the implementation of Sarbanes Oxley Act(Dowling &Jahmani, 2008). The requirements of Sarbanes Oxley Act and voluntary disclosures have enhanced the market liquidity through decreasing information asymmetry and trading costs(Dowling &Jahmani, 2008). “The most significant outcomes associated with SOX compliance was perceived by the private companies to be improving documentation and testing, strengthening of their governance procedures, ethics, and conduct codes, adopting of the best practices by public companies, and the updating or addition of whistleblower policies” (Dowling &Jahmani, 2008, p.62). “Most private companies consider Sarbanes Oxley Act’s initiatives as a prior preventative maintenance rather than a post problem solving” (Dowling &Jahmani, 2008, p.62).