Advantages and Disasvantages of Sarbanes-Oxley Act of 2002 (sox)
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Introduction:
When contemplating the advantages and disadvantages of Sarbanes-Oxley Act of 2002 (SOX), a U.S. federal law created in response to the numerous amount of corporate and accounting scandals. Arguments were made that SOX has strengthened corporate accountability and improved public confidence in big business and the U.S. securities markets. He notes that while SOX may have negatively affected the earnings of certain corporations, the best argument in favor of the law comes from looking at the performance of the financial markets.
There are both advantages and disadvantages of the Sarbanes-Oxley Act of 2002 (SOX), a U.S. federal law enacted in response to a number of major corporate and accounting scandals. Arguments include the doubt that SOX has strengthened corporate accountability and improved public confidence in big business and the U.S. securities markets. He notes that while SOX may have negatively affected the earnings of certain corporations, the best argument in favor of the law comes from looking at the performance of the financial markets.
Looks at the advantages and disadvantages of going private for banks in the U.S. Background on the Sarbanes-Oxley Act; Growth in costs and burdens of federal securities law compliance in the country; Role of going private in reducing the securities law and accounting rules compliance expense and administrative burden.
Advantages:
When three leading economists examined 230 recently alleged corporate frauds in America from 19% to 2004, Guess who they found was most likely to reptirt corporate wrongdoing in the pre-SOX environment? It wasnt the auditors, it wasnt industry regulators, and ill wasnt the SEC. It was employees. During that time, only one-third of corporate frauds were discovered by auditors, industry regulators, or the SEC–the very people and organizations responsible for uncovering fraud. After SOX, however 50% of serious frauds were exposed by those with a professional responsibility to do so.
Expense reductions. The greatest advantage of going private is the reduction of tbe securities law and accounting rules compliance expense and administrative burden. This includes costs relating to the preparation and filing of SEC reports; consultation with counsel regarding ongoing SEC requirements; and maintenance of a large shareholder base, including the costs of communicating with those owners through periodic mailed reports. In addition to such quantifiable costs, banks experience less readily quantifiable, but no less significant, costs represented by the management time and attention involved in the SEC reporting and compliance process. Efficient use of capital A repurchase of the companys outstanding stock is an efficient way to deploy excess capital. Coupled with the expense savings realized through cessation of SEC reporting, the repurchase is likely to increase return on equity and earnings per share after the going-private transaction bas been completed.
Flexibility in corporate manage- >>:cut. Elimination of the applicability of Regulation FD and other SEC oversight relating to investor communications provides additional flexibility to companies. Without the corporate governance requirements imposed by SOX and stock exchange regulations, banks will have additional flexibility to tailor their board and committee composition and activities to their needs.
Positioning for subchapter S election. Finally, a going-private transaction can provide an opportunity to elect subchapter S status if the transaction reduces the number of eligible shareholders to 100 or less. In recent years, several banks have undertaken going-private transactions as an efficient means of reducing their shareholder levels.
SOX audits promote transparency and ensure reliable financial reports. They have
uncovered many material weaknesses in in temal controls that have contributed to
a dramatic rise in the number of financial restatements. SOX-driven correctives and
disclosures inspire greater inve.stor confidence and ultimately support a more efficient
capital allocation process.
* The potential consequences of a failed SOX audit motivate companies to maintain
higher quality transaction controls and corporate govemance that might not otherwise
exist. Those consequences apply particularly to the cost of capital, because
failure to comply with SOX potentially affects stock prices, borrowing rates, and
bond ratings. Thus, the fear of failure results in extra assurance for investors.
* The SOX review forces companies and auditors to place greater emphasis on the
control environment and its ongoing continuity. Section 404 adds pRx;ess evaluation
to traditional account validation, and holds both management and its public auditors
more accountable.
* The exercise of maintaining extensive documentation of intemal controls required
by SOX section 404 potentially fosters a better control mindset among accounting
staff This mindset can sometimes lead to control process rationalization and
streamlining.