Writing Case Studies: Sarbanes-Oxley Act

Writing Case Studies: Sarbanes-Oxley Act

1. The Purpose of the Act

The overall purpose of the Sarbanes-Oxley 2002 Act is to protect investors and the public interest from unwarranted corruption and illegal undertakings of corporates in America through an auditing perspective. The Sarbanes-Oxley Act was officially signed into law in America on July 30^th 2002.

The Act was promulgated to quell the growing scandals surrounding corporate America with specificity to the securities market (Shirley, 2004). To be specific, the prompt on the amendment of the law was as a result of the collapse of one of America’s largest and most profitable companies in 2001 known as Enron Corporation. Enron Corporation portfolio encompassed energy, commodities and Service Company. The fate of the company affected thousands of employees and produced a shock wave to Wall Street. At the height of its fall, the company’s share price was at $ 90.75 and soon after the company declared bankruptcy on December 2001 selling its shares at $ 0.26. The volatility and unpredictability of the American market underscored the issues pertinent to the collapse of one of the largest and most profitable companies in the country. As a result, a proposed rendition amendment prompted in 2001 by the Securities and Exchange Commission was disseminated. The initiative was to propose regulatory changes to the federal securities law. Amendments were made including the regulatory role of a commission tasked with providing appropriate rules and regulations concerning the protection of investors and the public interest (PCAOBUS, 2004). Therefore, strict regulations were provided within the Sarbanes-Oxley Act of 2002. However, years on, loopholes in the regulations were uncovered with more scandals surrounding corporate America. Among them was the Global Crossing, Adelphia and WorldCom Corporation dissipation which revealed that there were systemic problems within the legal framework (Shirley, 2004). To rectify this, an amendment known as the Dodd-Frank Act Title IX was included. The amendment surrounds the inclusion of investor protections and improvements to the regulatory securities. Shirley (2004) points out that the rate at which the SOX law was promulgated was questionable. Nonetheless, the impact it has created in safeguarding the public interest, and investor interest has made strides ahead of repercussions such as unforeseen economic downfalls and collapse of companies due to unworthy leadership and management corruption. Therefore, the overall purpose of the SOX Act was to safeguard the interest of the public and that of the investors.

1. Major Components of SOX

The Act has eleven major components that are summarized as follows:

Title I: Public Company Oversight Accounting Committee

The specifications in this title foresee the roles and responsibilities of the inducted committee tasked with oversight on the auditing and accounting firms responsible for forensic analysis on accounting as stipulated in the securities law. On top of that, the committee is authorized to set out the rules and regulations within the framework of the Act upon the corporations and the securities exchange platforms. In summary, the title specifies that the role of the committee is to investigate and inspect any transactions conducted within the compliance of the law by public accounting firms and certified public accountants (Congress, 2002).

Title II: Auditor Independence

The general perspective on this regulation is on the amendments of the Securities Exchange Act of 1934 which stipulates the prohibition of an auditor from conducting specific non-audit related activities (Congress, 2002). The stipulation in the amendment law is that the auditor requires approval from an audit committee of the issuer for those non-audit related services that are not provided within the Act. In other words, the tenure basis for an auditor is stipulated at five-years with a recommended approval from an audit committee or company from the issuer.

Title III: Corporate Responsibility

The roles and regulations of audit committees in the clause provides that the committees should be responsible for the appointment, compensation and oversight of any public company that is registered as an accounting firm (Congress, 2002). Furthermore, it is indicated that an audit committee member needs to be registered under a board of directors of the issuer otherwise, can be independent.

Title IV: Improved Financial Disclosures

The clause dictates that financial reports should be filed with the SEC to reflect on all information inclusive of material such as correcting adjustments that have been identified by the accounting firm (Congress, 2002). These regulations are stipulated within the generally accepted accounting principles.

Title V: Analysts Conflict of Interest

The SEC is mandated to provide regulatory amendments on potential conflicts of interests for the professionals. It includes restriction on pre-publication clearance on research reports by persons engaged with banking activities or in investment research (Congress, 2002). Other regulations include limiting supervision in addition to compensatory clearance and establishment of safeguards on security analysts with respect to investment firm review or oversight.

Title VI: Commission Resources and Authority

The permission to use the appropriations for Financial Year 2003 under the SEC such as staff compensation, enhanced oversight on auditors and audit services in addition to fraudulent services including market regulations.

Title VII: Studies and Reports

The provisions under this title stipulate that factors on consolidation of public accounting firms and reduction in number of firms need to be regulated under the securities law (Congress, 2002). It also impacts on capital formation and security markets under the proclamation of the Congress.

Title VIII: Corporate and Criminal Fraud Accountability

This is an amendment of the Corporate and Criminal Fraud Accountability Act which stipulates the imposition of criminal penalties. They include destruction, concealing and falsifying records or obstruction of federal investigations (Congress, 2002). The penalties include a five-year jail term or review of work pertaining the issuer.

Title IX: Investor Protections and Improvements to the Regulations of Securities

The amendment of this law was promulgated under Dodd-Frank Act which stipulated on investor protection (PCAOBUS, 2004). The clause includes increasing investor protection. The original act encompassed corporate tax return under the Accountability Act of 2002 (Congress, 2002).

Title XI: Corporate Fraud Accountability

The final aspect is on corporate fraud accountability act of 2002 (Congress, 2002). It amends the federal law on establishment of a twenty-year prison term for tampering with a record or impending investigation.

1. Impacts of SOX on Publicly Traded Companies

A survey on the impact of SOX on publicly traded companies was conducted under the regulation of the SEC. The shocking revelation was initially on the impact on publicly traded companies. According to Katz (2005), it has become less desirable to a publicly traded company. The reason is based on the fact that the Act has altered the management and director priorities for companies as a resulting, significantly affecting productivity. Additionally, it was revealed that the Act has considerably affected how investors and shareholders relate to their companies (Katz, 2005). For instance, SOX has greatly increased expense on corporate legal services such as increased audit services and consulting fees. Overall, the rate at which public corporations are working in America is expensively conjected to the SEC regulations. Therefore, Katz (2005) has increasingly decreased the attractiveness of the U.S capital market relative to foreign investments. As such, investors in U.S companies suffer the expenses on management and fees associated with increased auditing regulations.

Additionally, the regulations have made it more difficult for companies in America to operate especially the publicly traded. According to Shirley (2004), the SOX has made it unfavorable for investors to invest in public corporations. The ones that have suffered most are the smaller traded companies (Katz, 2005). The overall impact is that it has greatly undermined the value of companies given that the auditing fees and services are skyrocketing. Therefore, the SOX has negatively affected the value of public corporations and ultimately, affecting their value.

1. Criticisms of SOX Act

The Act has suffered numerous unending criticisms that are negative in nature. Among the resounding issues is on the aspect of cost. Critics have indicated that direct costs have exponentially increased as a result of the amendment (Jahmani and Dowling, 2008). On one end, the value of a company from a market point of view including compliance costs has skyrocketed. The imposition of unnecessary but significant costs on public companies has been noted. For instance, it was discovered that the ratio of audit fees to assets increased after the enactment of the Act. Hence, it is conclusive that critics indicate that compliance direct costs have increased since the induction of the Act.

Additionally, criticisms of indirect costs have not been spared. The consensus is that costs have either been underestimated, ignored or unforeseen. The reason is that direct costs have increased over the years pertaining to the enactment of the law (Jahmani and Dowling, 2008). Consequently, this has also affected the non-cash expenses of public companies in America. The underscoring issue is that indirect costs can neither be quantified nor measured. The consequence of this is that companies are losing largely both domestic and foreign. In the recent past, companies have withdrawn from SEC and alternatively, most have refused to be listed within the SEC. The shocking criticism is that most companies are opting to invest IPOs in foreign exchange markets in lieu of rising capital in the U.S. markets (Jahmani and Dowling, 2008). Therefore, the conclusive issue is that SOX has received negative criticism on the demands stipulated within the Act.

1. Recommendations on Improvements of SOX
2. The first recommendation is to perform a SOX diagnostic. The diagnostic shall encompass aspects of impact, industry trends, changing auditing requirements, effect on management and leadership as well as evolution in market trends. This recommendation relies on the fact that issues on SOX compliance redundancy which has been observed as a financial burden to most companies.
3. There needs to be selection of the right professionals for the diagnostic program. As noted throughout the paper, the issue with SOX is that it was promulgated as a reaction strategy after the fall of one of the largest firms in America through Congress. With due respect, it is pivotal that issues surrounding SEC should be evaluated by the right persons who would recommend the best strategies in improving the Act. For instance, the amendment of Title IX under the Dodd-Frank Act provided a more elaborate and substantive resolve to handling investor protection and the general, public interest. Such resolution will improve how well the Act performs.
4. The reformed aspect on the process should include aligning all stakeholders and partners. The reason is that due to market volatility, unrestrictive laws that render people to conduct unlawful acts, the only way to reassure the public is through alignment of shareholders. Through the SOX diagnostic, it will be discovered that shareholders are of different types and operate in silos. Therefore, the strategy is to provide a conclusive and elaborative manner in aligning shareholders under one common goal.

 

 

References

Congress. (2002). H.R. 3763-Saebanes-Oxley Act of 2002. Congress.Gov. Retrieved from https://www.congress.gov/bill/107th-congress/house-bill/3763

Jahmani Y. & Dowling, W. (2008). The Impact of Sarbanes-Oxley Act. Journal of Business & Economics Research. Volume 6, Issue 10. Retrieved from https://pdfs.semanticscholar.org/b80a/7456a71dca7a2c5fd462158d998cdae29fb7.pdf

Katz, J. (2005). General Impact of Sarbanes-Oxley Act. Sec. gov. Retrieved from https://www.sec.gov/rules/other/265-23/2652364.pdf

PCAOBUS. (2002). Public Law 107-204. Retrieved from https://pcaobus.org/About/History/Documents/PDFs/Sarbanes_Oxley_Act_of_2002.pdf

Shirley, J. (2004). International Law and the Ramification of Sarbanes-Oxley Act of 2002. Boston College International and Comparative. Volume 27 Issue 2. Retrieved from https://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1136&context=iclr