Sarbanes-Oxley-Context & Theory

Sarbanes-Oxley-Context & Theory

Jasso, S. (2009). Sarbanes-Oxley-Context & Theory: Market Failure, Information Asymmetry & the case for regulation. Journal of Academy of Business and Economics, 9.

Central Theme

Sarbanes-Oxley- Context & Theory, is an article by Sean Jasso and whose primary goal is attacking various questions that are helpful in the understanding of Sarbanes –Oxley as a public policy. To ensure the questions below were answered: how can the market failure concept be applied to ethical corporate governance? How authentic are corporate ethics in lip service or the Modern Corporation? Is it possible for Sarbanes- Oxley to gain positive results? Jasso structured his argument into three fragmentations. The form in which Jasso fragmented his arguments is through the philosophical and historical context of the firm presented by Aristotle and Adam Smith, focusing on examining the market failure and information asymmetry issue, and finally, critically analyzing the Sarbanes- Oxley from the policy analyst perspective. Of importance is that Jasso primarily looks into providing a more advanced understanding of the regulatory connection existing between the government and the corporation. In this article, Jasso puts across the argument on if Sarbanes- Oxley is a policy vital for the achievement of goals because SOX plays the role of protecting investors against any corporate fraud. It also ensures that the United States market is a safe place in which investors can work in, and advocates for strengthening of the organizational ethical standards through forcing executives to do so. The information asymmetry has a connection with various scandals in corporations infamously; hence, the need for greater power requires high levels of reformations- not excluding laws and policies, specifically for this article the Sarbanes and the effect it has on the world of investment. Finally, Jasso contrasts Sarbanes- Oxley necessity: if the intervention is important and to what level could the aid in preventing malpractice.

Critical Analysis

Jasso segmented his arguments in various portions, as mentioned previously. At the start of his cases, Jasso began by discussing the commerce theory. In the theory of commerce, Jasso bases his focus on the philosophical analysis of the market. From a society’s point of view, the market is viewed as a solution for services, products, jobs, and opportunities for investing. Importantly, in the capitalistic economy, the market provides ownership of production factors: labor, capital, land, resources, knowledge, and entrepreneurship. The market has enormously crucial to society. I am in a position to relate to this particular segment of the argument since I am a victim of looking for those specific things from the market.

Additionally, Jasso highlights the theory of self-interest, which is the modern corporation’s root. As the source of the modern corporation for society, it has led to a part of its most significant misfortunes. The utmost troubles include the fraudulent corporations of the 1990s infested with greed and the markets of the 1920s that have remained unchecked. Adam Smith, who is popularly understood to be the self-interest father, postulates that there are two leading causes in the productivity of the modern industry, and these include capital accumulation and division of labor. Adam smith is purposely brought up to support the point that the hurdles and opportunities accompanying commerce are the fairness and wealth distribution themes. Moreover, Jasso utilizes Enron’s scandal to indicate market failure consequences as well as information asymmetry.

In the second portion, Jasso transits into highlighting the market failure issue under the information asymmetry theory. The Enron scandal becomes useful in this case since he uses it as the foundation of the argument. Firms or markets are bound to collapse because of various economic conditions such as reducing demand for products and failure to innovate. Still, Enron failed as a result of neither of those. Bad behavior was the root of Enron’s collapse. The problem that faced Enron was that they allowed risk and greed to overpower them, ultimately leading to their firm’s failure. It has been not very easy for me to understand the idea of behaving badly or unethically in a job setting, especially from individuals who are in high authority. Such people are egocentric since their worry is only about the benefits they are likely to accrue from the market, not thinking about their colleagues in their environment whom they are also expected to affect.

In another case, market failure can also be explained as a private interest pursuit, which leads to inefficient use of resources in a society. In market failure, information is what is involved. Weimer and Vining provide a two-way explanation of how information is included. Firstly, information has excellent public characteristics individually. This means that the production and consumption of information itself lie in the interest of individuals. To elaborate, a single individual’s use is independent hence does not interrupt another person’s consumption. Secondly, incidents occur where the amount of information provided concerning the features of a good vary in important ways among different people. Connecting this with the highlight about Enron, products were not part of the picture, and rather it included 401ks, capital accounts, and people’s jobs. Therefore, it is evident that bad behavior was the cause of Enron’s market failure.

Market failure and asymmetry of information cover the necessary foundations of Sarbanes- Oxley as well as understanding its impacts on the investment side of things. Besides SOX seeming to be inherently beneficial, it still has a variety of critics, including individuals who claim that it is too costly, unfair, and attacks profitability. As a result, Jasso had to carry out a comparison in which he related SOX to pollution control. For example, it aims at helping the greater good; however, it is like a tax. Moreover, it will heighten the confidence of investors by requiring stronger transparency and will place strict punishments for fraudulent behaviors among executives.

The structure that Jasso developed for this article was useful for supporting his argument. It enabled him to present the intended information in an informative and organized manner. Through the interviews in this article, I have realized the level to which SOX is vital to companies. The chronological arrangement of this article is a strength that enabled Jasso to pass his intended information well.

From my job, I can relate to this. Often, external auditors chip into our work branch to investigate and ensure that we are correctly and, most importantly, performing our jobs ethically. Their mission begins by watching on the mode at which we handle cash, the processing of transactions as well as cash limits maintenance to the level we are supposed to be in. Furthermore, they monitor us as we calculate our closing procedures by ensuring that our cash boxes are well balanced as the night ends. They also ensure that no one false-balances the boxes. This closely relates to Jaso’s work because the auditors keep a close watch over us, ensuring that there are no fraud incidents since our company deals with people’s finances and money. Ultimately, I agree with Jasso’s argument wholeheartedly, the SOX is relevant and essential legislation which should continue serving the purpose it is meant for as a policy reactive on malpractice.

Main Takeaways

In conclusion, Jasso explains the malpractice issue in the corporate world through explaining information asymmetry; according to this reading, I am convinced that such an issue roots deeply in the ethics and behavior of the higher executives. He also indicated that a corporation’s failure likely results from the malpractice of the few; however, this kind of theme is evident in other societal areas. For instance, in Kohlberg’s model of moral development, they exhibit a child in which they conduct their actions to ensure that they are not punished or to receive a reward. In ceteris paribus, let us hold all else equal; there have not been incidents of dealing with bullying. As a result, in a case where a child hurts another irrespective of the reason, the principle is left with no option but to set rules and punish any bullying actions. Maybe, the set rule does not affect the other children in the school, but the existence of that particular mandate acts as a constant reminder to children that bullying is not accepted. This is an example that relates directly to the world of investment.

Enron, a corporation that particular time was a Fortune 15 company, has a bad reputation of being recognized ruined everything for every other business. At a specific period in time, firms enjoyed the freedom of entering and leaving the world of business, but how much did it cost them? This perfectly synergizes with Jasso’s information in the lecture that public policy is essentially necessary only if it is righteous. Overall, SOX is responsible for regulation, promotion, and rewarding of businesses and also punishes those who go against the mandates.

This article continually reminds us of the morality and ethics that lead to the various issues of corporate malpractice and scandals begin on public policy; despite us being in a position to opinionate the knowledge, we have to have a better grasp of the different sides of the situation at hand. Nevertheless, the lecture in the first few weeks provides a strong base on character and ethics. Jasso perfectly defines the requirements of a good personality. The talk enables me to understand what I should do better myself in the future and especially in the world of accounting.

This article has, however, deemed helpful in various perspectives. Since I plan to concentrate more in the Accounting area, the piece is very eye-opening. It helps me understand more and know what it means to ensure that a firm remains ethical. The performance of immoral or unethical behavior in a firm leads to its destruction. I had little or no idea about the Sarbanes – Oxley before reading this article. However, now that I have read it, I feel well equipped with a better insight into realizing the impact that Sarbanes-Oxley has on companies, more so, the ones that shortly I will be working with.