Sarbanes-Oxley Act Research Assignment Paper (Essay Sample)

Sarbanes-Oxley Act
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Sarbanes-Oxley Act
The accounting malpractices that came into light in the early 2000s prompted the US government to develop and implement rules that could be used in the business arena to prevent such scandals. The Sarbanes-Oxley Act (SOX), for example, was enacted to assist in overhauling existing regulatory standards that had substantially affected investor confidence following accounting malpractices unearthed in leading corporations such as Enron, Tyco, and WorldCom (Franzel, 2014). This paper reviews the Act with the view to demonstrating how it has revitalized the Securities and Exchange Commission (SEC).
Summary of Sarbanes-Oxley Act
The US Congress passed SOX into law in 2002 with the main objective of increasing investor confidence by shielding investors from the likelihood of fraudulent accounting activities that were deeply embedded in unethical financial reporting practices (Jahmani & Dowling, 2008). The Act mandated strict reforms intended to improve financial disclosures and prevent accounting fraud by establishing the Public Companies Accounting Oversight Board (PCAOB) to not only oversee financial statement audits of publicly-traded companies, but also to implement ethical auditing standards in the country. This way, the Act has been able to change the corporate governance of American publicly traded businesses by requiring senior managers to take individual responsibility for the correctness and completeness of reported financial statements (Franzel, 2014). Additionally, the Act has affected business operations in the United States because some of its requirements have very costly consequences for publicly traded corporations in the country. In fact, available literature demonstrates that small companies operating in the United States have been unable to publicly trade their shares in stock exchanges because it is costly to develop and maintain the required internal controls (Afterman, 2015). Some critics have also argued that “the costs of implementing SOX with all its requirements would far exceed the benefits gained” (Jahmani & Dowling, 2008, p. 57). This assertion is justified by the detrimental cost burdens that smaller public companies continue to experience as they implement SOX regulations.
Governance Principles of Regulatory Compliance Requirements
Section 302 of the Act requires senior managers of publicly traded corporations in the US to certify the accuracy of the reported financial statements with the view to reducing corporate misconduct and strengthening ethical financial reporting practices. Section 403 of the Act is also a governance principle by virtue of requiring that “any transaction involving management or principal stakeholders’ needs to now be disclosed by the second business day of the transaction” (Jahmani & Dowling, 2008, p. 58). Additionally, section 404 increases the stringency of procedures and requirements for financial reporting by asking senior managers and auditors to not only institute internal control mechanisms and reporting methodologies for publicly traded corporations, but also document, test and maintain the identified controls to ensure their adequacy and effectiveness (Jahmani & Dowling, 2008). Other governance principles associated with SOX include increasing the severity of penalties against deceptive financial practices and enhancing the independence of external auditors who are charged with the responsibility of assessing the correctness of corporate financial statements (Franzel, 2014). Today, external auditors are able to operate with an adequate level of independence from their audit customers (corporations) due to the restrictions contained in the Act, while corporate managers are required by the Act to generate trustworthy financial statements.

Role of SEC
SEC is charged with the role of protecting investors, maintaining fair and efficient markets, and enhancing capital formation by, among other things, facilitating transparent financial disclosures to investors, overseeing key markets participants, reinforcing market structure and systems, promoting disclosure of important market information, protecting investors against fraud and other deceptive activities, as well as evaluating, developing, and maintaining appropriate rules and regulations in the market (Rubin & Selin, 2016). SOX affected the agency in terms of providing it with the necessary frameworks and mandates to restore public confidence in the financial system by preventing corporate fraud and intentional deception. Additionally, most of the provisions contained in Title IX (white collar crime penalty enhancement) of SOX have provided the SEC with the needed justification to apply severe sentencing guidelines for individuals involved in white-collar crime, while provisions contained in Title XI (corporate fraud accountability) provides the agency with powers to temporarily freeze transactions or payments that are perceived as unusual in accordance with the provided recommendations (Donaldson, 2005; Orin, 2008).
Overall, it is evident that SOX regulations have enabled the SEC to not only re-establish investor confidence in terms of enhancing the integrity of corporate disclosures and financial reporting practices, but also to strengthen capital markets by enforcing standards of fair dealing and honesty. However, the Act has also adversely affected the agency in terms of enhancing lost investor opportunities due to cost considerations. Indeed, some big non-domestic publicly traded corporations have already withdrawn their listing from US exchanges, while others “have announced decisions not to list on the US exchange specifically citing the compliance costs associated with SOX as the main reason” (Jahmani & Dowling, 2008, p. 60). Consequently, the agency is unable to meet some of its objectives as ...