The Sarbanes-Oxley Act free essay sample

The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002(SOX which is also known as the Public Company Accounting Reform and Investor Protection Act was enacted in July, 30, 2002 as a prompt response to the financial crimes scandals (Adelphia, Enron, WorldCom, Peregrime Systems , Arther Anderson and Tyco International). SOX establishes new, stricter standards for all US publicly traded companies. It does not apply to privately companies. The Act is administered by the Securities and Exchange Commission (SEC), which deals with compliance, rules and requirements. The Act also created a new agency, the Public Company Accounting Oversight Board, or PCAOB, which is in charge of overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. In my opinion, the benefits of the act cant be able to overcome the frustration and the cost of it. The legislation was to redeem the confidence and faith of the public in the capital markets as well as strengthen corporate accounting controls. We will write a custom essay sample on The Sarbanes-Oxley Act or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page So far in the political arena, the law has achieved its goals; more people have faith in the stock market (Gilson 5). Nevertheless, in the economic wise, the reports, observation and the trend of life the Act has caused is not pleasing. The Act did create a series of oversight measures as well as increase the sanctions for white collar crimes; frauds and accounting malpractices just to mention a few. This law meant well but economists could not help reflecting on what the implications on the economy that would be as a result of the new law (Gilson 5-6). The Act provides for the establishment of the Public Accounting Oversight Board to supervise the accounting industry to ensure that cases of conflict of interest are not repeated as was in case in the Enron fraud. The Act proscribes auditors from being consultants in the audit works of their clients (Gilson 6). Executives are also not allowed to receive loans from the company they work for and whistle blowers are promised jobs. Section 404 of the Act mandates that managers shall be held responsible for loss of control of internal structure and failure to report any malpractice of financial procedure (Gilson 6-7). Executives are expected to personally certify corporate accounts. Auditors are expected to attest to company’s internal control and disclose any loop holes and weakness. Where fraud was discovered, the Act prescribed for criminal penalties for the culprits (Gilson 7). At the first instance of the enactment of the law, critics argued that the Act was too expensive to enforce and discourage investors from the United States business market. It has been eight years since the Act became effective (Zhang 1). The wall street journal has reported that the Act has led to companies outsourcing from countries like India. The Act has inhibited job growth and provides fewer benefits for shareholders thus less people are investing with American companies; this economists have revealed that the U. S economy is hurting. Sarbanes-Oxley Act has resulted in hidden costs for employees, consumers and businesses (Berlau 1). Section 404 has been rebuked for being costly when it requires auditors are expected to sign off on internal controls too and not only company accounts. he internal controls range from business software any other tangible assets of a company that are linked to the company’s financial statements. Auditors now insist on signing off on every purchase a company made in the financial year (Berlau 2). Companies have lamented at the high cost of documentation they now spend since the Act was implemented on documenting even wasteful and obscure data. Economists argue that the money sp ent by companies in the implementation and enforcement of Acct is enough to create more jobs and hire more employees thus reduce the unemployment rate in the U. S. that is hurting the economy (Berlau 2). According to a survey conducted by the Financial Executives International (FEI), the average cost of implying with section 404 of Sarbanes-Oxley Act had cost businesses about $ 3 million for 26, 000 on internal working hours auditing. The Chief Accounting Officer of General Motors was quoted saying that the Act has misdirected the attention of executives; instead on focusing on how to run the business, the executives are focused on implying with the Act thus companies are performing poorly and suffering losses. The sum of both indirect and direct costs of the Act has outweighed the benefits the Act has achieved. On the cost and benefit analysis, the Act has failed to be an economic wise decision and since the government is able to bail out financial institutions, it should also seek to amend the Act. Up to around 2005, companies were wasting multibillion dollar to implied this Act. A PWC surveys revealed that the over-regulation implemented by the Act was responsible for 59% of the growth stagnation of many firms in the United States. Human resources are said to be scarce and it is in this scenario that laws are formulated to deal with the scarcity of resources. It a human nature to accumulate more wealth even in the face of scarcity and thus property law have been established to protect individuals property rights and privileges (Bruce 3-5). The Chicago school of law and economics postulates that common law is best suited in planning for efficient legal rules. In the face of scarcity, man either robs what another man has acquired or works hard to acquire property therefore law is imperative (Bruce 5-6). The only involuntary property transfer advocated by the law is the taxation policy; every individual pays some form of tax to the government from income task to stamp duty imposed on essential documents as well as tax on goods (Bruce 7). According to Max amp; Ermas chief financial officer, the chain of restaurant business planned to withdrew from the stock market as soon as the Sarbanes-Oxley Act was implemented as the Act was not good for business . He recounted that the cost of $600,000 that the Act is going to cost that is enough for them to open another restaurant and thus employ more people (Oppenheimer 1). More businesses followed suit because of the expensive nature of the Act. However, withdrawing from the stock market will not help the companies grow bigger, in fact it stagnates the growth of this companies as their capital resources cannot be utilized and in the long run, the employed rate will also be negatively affected. Arguably, the Act has been chastised for being the reason why the American economy won’t pick up from the recession. Outsourcing has been where companies are shifting gear too and creating more dents into the economy (Campbell amp; Picciotto 2-3). With or without the Act, transaction fraud are still appearing in the economic world, take Bernard Madoffs fraud for example. Although the act was implied since 2002, Madoffs company still be able to create fake document to scam 50 billions dollar of many investors. The act is not only create a new fix costs for companies but also doesnt help investors much. The only way that public can really avoid fraud and scam is when the company have moral hazard and the investor are wiser with their decision. Work Cited Berlau, John, Puts amp; Calls: Sabarnes-Oxley reform harming economy. The Pittsburgh Post- Gazette, November 15, 2005. Retrieved on March 31, 2011 from