Should the Benefits of Sarbanes Oxley Outweigh its Associated Costs?

Abstract

Sarbanes-Oxley Act (SOX) is a regulation that has been passed as a response to financial scandals like Enron and WorldCom for the protection of the shareholders and the public from any kind of fraudulent activities being practiced in the company. The act is administered under the laws of the Securities and Exchange Commission (SEC) which is responsible for setting the guidelines, and the companies have to comply with the rules and requirements. The companies which do not comply with the regulations stated in the act are confronted to fines, imprisonment etc. This has posed a challenge for the organizations as they have to create and maintain the records cost effectively to meet the demands of the legislation. This paper argues should the benefits of Sarbanes Oxley outweigh its associated costs in the long run.

Abstract2

Introduction4

Discussion5

Key Benefits of the Act5

Effectiveness of Regulation in Minimizing Corporate Fraud5

Impact of the Act on the Functioning of the Business6

The Benefits of Sarbanes Oxley Outweigh its Associated Costs8

Conclusion11

References12

Should the Benefits of Sarbanes Oxley Outweigh its Associated Costs?

Introduction

The Sarbanes-Oxley Act took effect in July 2002 and introduced crucial changes to the regulation of financial practice and corporate governance. Named after its main architects- Senator Paul Sarbanes and Representative Michael Oxley, this act set numerous non-negotiable compliance deadlines. It is set into eleven 'titles'. The act established a central public company accounting board, which was introduced among a host of publicity. The main purpose of introducing the Sarbanes Oxley Act was to detect and target the internal illegal and unjustified practices with regards to auditing and finance, pension funds, facilities of loans given out to executive level employees and corporate directors, violations committed by Securities and Exchange Commission. The idea was to curb and put a stop to unlimited number of corporate scandals and filing of criminal cases and actions against corporations, directors, managers or shareholders. It provided a useful means for dealing with lack of corporate quality and control measures and unethical behavior in connection with the auditing practices of organizations. Despite the fact that it has proven to be extremely useful, many experts suggest that it might not prove to be that effective in terms of bringing positive change in general corporate behavior. The aim of this paper is to discuss the impact of Sarbanes Oxley Act on the auditing practices of corporation and, whether the benefits of Sarbanes Oxley outweigh its associated costs or not in the long run.

Discussion

Sarbanes Oxley Act was put in place due to numerous economic issues and corporate scandals such as Enron (misreporting in financial statements), WorldCom and other major corporations at the beginning of 21st century (Messier, 2008; Prentice, 2005). Congress had to take care of the Corporate and Auditing Accountability, responsibility and transparency Act which was later known as Sarbanes Oxley Act of 2002. According to this Act, new policies and procedures of accounting and auditing were established with the enhanced provision for civil and criminal penalties and punishment for getting ...