Importance of Sarbane-Oxley Act

Published: 2019-10-28 11:00:00
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Sarbane-Oxley Act was named after its sponsors, Sen. Paul Sarbanes and Rep. Michael G. Oxley. It was introduced in the Congress as "Corporate and Auditing Accountability, Responsibility and Transparency Act of 2002" and later signed into law by President George W. Bush on July 30, 2002. The enactment of this legislation was necessitated by major corporate scandals including WorldCom and Enron that required a dire need for the house to protect investors and other shareholders to grow businesses.

Sarbane-Oxley act has got several benefits. First, it ensures disclosure of relevant information to shareholders. The primary role of this act was to protect shareholders from unscrupulous directors (Dowdel, 2014). For example, Enron's CEO Jeffrey Skilling hid the losses of the company from its shareholders. Notably, Enron was at the time, one of the biggest businesses in the world. The shareholders were successfully deceived which led to the collapse of the company. As such, the act makes it compulsory for businesses to disclose all information to shareholders which boost their confidence on such investments.

Additionally, it gives importance to the need for internal audit and controls. Management of companies is required to test internal controls at least quarterly.According to Arpings (2010), internal checks and controls ensure that all operations are done in a transparent manner in a firm. In the case of Enron Company, multiple underhand activities led to its collapse. This is perhaps the most expensive clause to comply but in the long run, the benefits override the costs.

It has increased the involvement of the audit committee. Previously, the posts of the board of directors were viewed by many as ceremonial. The act, however, has made it mandatory for the board members to ensure that all accounting activities are above board personally. This is because there is increased legal liability in case of any underhand dealings. For example, Yankee Candles had to change the composition of its board members to accommodate a financial expert. The board of directors in Yankee Candles is now able to conduct internal auditing for the company.

It has also led to exploit the convergence of opportunities. Dubois (2011) notes that while some directors are struggling to comply with this act, others like RSA Securities have readily welcomed it and used it as a competitive edge against competitors and to enhance efficiencies. According to RSA Securities vice president, John Parsons, they realized that single sets of controls could enable the company to comply with several acts of parliament. For example, they have a single log- where some employees have read only' rights while others can edit the information and others cannot even access the information.

In conclusion, despite criticism from various quotas, the Sabarne-Oxley law has helped in stabilizing companies in the USA. Companies like WorldCom and Enron would still be thriving if the law was in existence those days. It has boosted the confidence of shareholders, increased the importance of internal controls, improved the involvement of auditing committees, and enabled companies to exploit the convergence of opportunities.

References

Arping, S., & Sautner, Z. (2010). Did the Sarbanes-Oxley Act of 2002 make firms less opaque. Evidence from analyst earnings forecasts.

Dubois, M., Dumontier, P., & Fresard, L. (2011). The real effects of global financial reforms: What do we learn from a MAD regulation?. Working Paper.

Herda, D. N., Notbohm, M. A., & Dowdell, T. D. (2014). The effect of external audits of internal control over financial reporting on financial reporting for clients of Big 4, Second-tier, and small audit firms. Research in Accounting Regulation, 26(1), 98-103.

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