The Impact of the Sarbanes-Oxley Act on Publicly Held CompaniesEssay Preview: The Impact of the Sarbanes-Oxley Act on Publicly Held CompaniesReport this essayIntroductionThe Sarbanes-Oxley Act of 2002 (SOX) was passed as a result of the Enron, Tyco and WorldCom scandals (Slaughter). Its main purposes were to prevent companies from engaging in accounting fraud, improve the reliability of financial reporting, and restoring investor confidence (Wagner & Dittmar, 2006).
The Act dictates how all publicly held companies are required to report their financial information (Magloff). While SOX increased the accuracy and validity of the financial information available to outside stakeholders, it created many challenges for businesses that have to comply with SOX guidelines. In 2005 Section 404 of the Act took effect and increased “unproductive auditing expenses” (Swartz, 2005). In 2010 President Barack Obama passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to further improve the accountability and transparency of the financial system (Brief Summary of the Didd-Frank Wall Street Reform and Consumer Protection Act).
Statement of the ProblemRegulations are created for a reason and they produce benefits. These are meant to protect us and discourage fraudulent actions by others. However, they come with a cost. The requirements of the Act can place a burden on businesses of all sizes, and penalties for noncompliance are very serious. Companies must spend to ensure compliance and the costs are estimated from hundreds to millions of dollars based on company size and the specific reforms required (Martin & Combs, 2010). Because the Act requires a high level of financial reporting and internal auditing, it can place a disproportionate burden on smaller companies to make sure they are in compliance. The management teams of all companies have a legal duty and are held personally responsible for the reliability of the financial statements. While large companies may have teams of auditors and accountants to do this, smaller companies may struggle significantly (Magloff).
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Conclusions The above-quoted research has shown a strong strong link between the lack of transparent audits and the negative financial performance of all accounting companies, including those for which audits have not yet been completed. Therefore, it is important that the need for a national system of audit reform, particularly in developing countries, is brought on by more comprehensive auditing legislation. Given the negative correlation between audits and real-world performance the Act is very important in this regard. The government must ensure that, with reform on the horizon, non-discrimination is maintained and there are significant job creation opportunities across all tax payers, including those in countries with the highest level of corruption.
[2] It is a critical public service that the Bill will put an end to the practice of charging too much for too little. It will also ensure that the Bill does not affect the ability of all of the relevant tax authorities to audit a company in the first place.
[3] The Australian Taxation Office is committed to reducing the time each company has to put in and the complexity involved, which is significantly reduced in many nations and territories. In the past, the Tax Office has taken the time to ensure that companies continue to be audited and their audits to the same standards as required under the Act (see above). This has led to the recognition of financial performance and increased trust among the audit and reporting agencies (Cindy et al., 2001). Since then, this trust and accountability has increased considerably, with many companies taking steps towards further transparency. It is important that changes that ensure audits are required are accompanied by improved information and accounting practices. Australia also needs to find a way to provide support of people with low or no income or skills to carry out audits. With a lack of access to tax information available, people with low income can avoid and avoid the difficult job of reporting income and assets, and the risk involved in obtaining a tax return.
[4] This includes a reduction in the cost of auditing (Daniels et al., 1999; Bremmer et al., 2002).
[5] In the UK, for the first time this is possible with an Australian system of tax auditing to facilitate the release of revenue to the public. The Scottish Government has taken another steps to ensure that those audits can be reported in the public interest. Scotland has also made it possible for businesses to return their returns or information to the Scottish Parliament. The Scottish Government will ensure that there will be a fair system of accountability whereby any businesses that fail to adequately report this sort of information to the Scottish Parliament are given the opportunity to comply with the Act. The Scottish Government agrees that these should be the case if the Scottish Parliament, the Scotland Council or the Scottish Auditor or whoever decides to use the laws to enforce the Act would like the Scottish taxpayers to be able to make a contribution.
[6] The European Commission recognises that the UK tax system is one of the most efficient in the world and that effective compliance from the outset is the key to achieving the goal of reducing taxes. The UK Government has taken a leading role in supporting a free, transparent and open society. With the rise of innovative businesses and investment, the UK Government believes there is a positive potential for the UK to take on high-value tax avoidance by people and businesses in other member states. In our view this needlessly has created an additional burden on business to report the same information to any other country and our Government will look to encourage business to do this. We continue to call on other European countries to share this responsibility and we will continue to work on the basis of the Common Market Framework and the rules and guidance given by the Commission.
[7] By working with organisations that support transparency and accountability, and building business into those that will, the Government believes that the public,
The goal of this paper is to determine the cost-benefit of the Sarbanes-Oxley by using archival research and secondary sources.In his blog, Marc Morgenstern (2009), who has been on the SECs Executive Committee for Small Business Capital Formation for more than 25 years and serves as the Senior Advisor and/or Board member to public and private companies stated:
Sarbanes-Oxley taught us that laws passed in an emotional cauldron, while well-intentioned, frequently have significantly adverse consequences. In the securities world, these consequences are disproportionately borne by smaller enterprises, public and private, and ultimately by all investors. We cant afford that. (Morgenstern, 2009)
Purpose of the StudyMany authors agree that the Sarbanes-Oxley Act was a necessary and useful piece of legislation. In her article titled “Executives Praise SOX but Seek Changes”, Nikki Swartz (2005) wrote: “while no one disputes the benefits, business leaders have been complaining loudly that the costs associated with Section 404 compliance are higher than expected and an undue burden” (Swartz, 2005).
In 2004, the initial burdens of implementing SOX were so great that it created uproar among publicly held companies that werent prepared for the costs of new accounting software and the additional audits that were required. As SOX went into effect, many were surprised by the weaknesses and gaps that compliance reviews and assessments had exposed. In the following years, a number of companies have begun to standardize and consolidate key financial processes to eliminate redundant information systems and eliminate unnecessary controls. It turns out that SOX-inspired procedures serve as a template for compliance with other statutory regimes (Wagner & Dittmar, 2006).
The initial purpose of this research was to learn more about the Sarbanes Oxley Act of 2002. In the process of conducting this research I discovered a number contradicting statements and the intent is to determine the cost-benefit of the Sarbanes-Oxley by using archival research and secondary sources.
RationaleThis topic was chosen based on personal interest and in order to understand the cost-benefit of the Sarbanes-Oxley Act of 2002. An archival method was used to compile empirical data on direct and indirect costs among companies that have implemented SOX as well as studies on restatements before and after SOX implementation. The intention is to consider a number of pertinent companies and empirical research such as reporting credibility in the context of earnings restatements and audit costs.
Research QuestionsThere are several questions that will be pursued in the course of this research. Among them are:Can either costs or benefits be measured or quantified?What are the benefits of SOX and/or Dodd-Frank Acts?What are the costs of SOX and/or Dodd-Frank Acts?Who is most affected by SOX and/or Dodd-Frank Acts?Significance of the StudyIt has been ten years since SOX was implemented and the jury is still out on the desired outcomes. Seeking employment within any publicly traded company requires knowledge and experience with SOX. Investors of all sizes should be aware of the protections provided to them by this legislature.
As the research unfolds, it becomes clear that there are a number of different opinions about SOX and its consequences on businesses, investors, auditors and accountants. Some people are great fans of the legislature, others are not very happy about the costs and requirements of SOX. It became necessary to determine if they can be identified, or if the benefits and burdens can even be measured, quantified or compared.
MethodologyThis research is to be developed by using the deductive approach, which is identified by going from the general objectives to specific definitions and assumptions. It is sometimes informally called a “top-down” approach (Trochim, 2006). The main objective of this research is to determine the cost benefit of the Sarbanes-Oxley Act of 2002 and its impact on financial reporting. The original theory was that the SOX act of 2002 was a financial burden on publicly traded companies and that the costs, both direct and indirect outweigh the benefits. More specifically it was a burden on smaller sized companies that didnt have the right resources