Sarbanes Oxley Legislation
Sarbanes Oxley Legislation
The impact of Sarbanes Oxley Act in the financial markets of the United States of America is playing an important role in the progress of financial growth of the overall economy. The Sarbanes Oxley Act was introduced in the year 2002 and the main reason of the Sarbanes Oxley Act was to implement the corporate governance codes and ethical standards for the listed and the non listed companies all over the United States of America. The main reason behind the Sarbanes Oxley Act is that the government of the United States of America wants to maintain the trust the ordinary shareholders of the companies. According to the statistics, more than eighty percent of the overall population of the United States of America is investing their funds in the stock exchange markets to generate dividend incomes. Therefore, in these circumstances, the Sarbanes Oxley Act 2002 increases the reliability of the financial markets and the trust of shareholders. As compared to the other financially strong countries such as Japan, China and European Countries, the majority of the financial frauds occurred in the United States of America. The famous fraud case of Anron Company is a trademark case which identified that the companies and corporations must be run according to the rules and laws. Therefore, the Sarbanes Oxley Act 2002 was implemented to maintain and improve the trust level of all stakeholders of the business. The Sarbanes Oxley Act 2002 is impacting the areas such as role of capital markets, flexibility of the corporations, securing the shareholders, compliance with other countries laws, internal control system and the proper legislation is keeping, the Sarbanes Oxley Act 2002 up to date. ("The Costs And Benefits Of Sarbanes-Oxley")
The first advantage of the Sarbanes Oxley Act 2002 is that it focuses on the importance of internal control system of the businesses. The internal control system can be defined as the internal audit department or the presence of Non Executive Directors. The role of internal control system is to challenge the decisions and strategies of the Directors of the business. Moreover, the internal audit department not only keeps account of every transaction within the business, they also accumulate the expenses, remunerations and the risk analysis to secure the interests of the shareholders. Non Executive Directors are the industry experts and most of the times they interfere in the decisions made by the directors at the board meetings. As the Non Executive Directors are the industry experts, therefore, it reduces the planning risk for the business at the initial stages of the new projects. The main role of Non Executive Directors is to make a link between the directors and the shareholders of the business to insure that all the information related to the business progress is communicated to the shareholders. Moreover, the strict laws of Sarbanes Oxley Act 2002 have the rules and standards for the appointment of non executive directors. Therefore, it is highly probable that the directors of the companies cannot manipulate the appointments of the non executive directors. Another main role of non executive directors is to access the risks associated with the business and its future planning. Non executive directors access the planning errors or the operational errors of the business and reports to the directors immediately. Moreover, the directors of the business are too busy with their operational duties; therefore, the non executive directors keep account of those risks which are not accounted at the time of strategic planning by the directors. (Slaughter)
Another main impact of Sarbanes Oxley Act 2002 in the United States of America is that it increases the ethical behavior of the companies positively. The Sarbanes Oxley Act 2002 is the words of law and it is compulsory for all the organizations and the corporations to adopt the Sarbanes Oxley Act 2002 in the original form. In the Sarbanes Oxley Act 2002, the laws written to improve the ethical behavior of the directors and the corporations as a whole are of the most importance. It means that the behavior of the directors must be straightforward and all the dealings of the business must be clear, transparent and complete. The element of integrity and honesty is the most important part of the Sarbanes Oxley Act 2002 in relation to the ethical behavior. In the past, due to the lack of ethical behavior rules, the directors were in a position to manipulate the dealings of the corporations to get personal gains. However, with the implementation of Sarbanes Oxley Act 2002, the directors are not in a position to manipulate the dealings of the organizations easily which is increasing the trust of shareholders of the businesses. (Slaughter)
The reduction of personal gain interests and the conflicts of interest of the directors is another main impact of Sarbanes Oxley Act 2002 in the United States of America. According to the Sarbanes Oxley Act 2002, the directors are the agents of the shareholders of the business and all of their actions and the dealings must be performed to maximizing the wealth of shareholders. The Sarbanes Oxley Act 2002, transfer all the powers to the shareholders to terminate any director who is involve in the personal gains and securing his own personal interests. In these circumstances, the non executive directors must communicate to the shareholders about the integrity and honesty of the specific director. (Slaughter)
Another important advantage of the Sarbanes Oxley Act 2002 is that it is compulsory for all the organizations performing business in the United States of America. Therefore, the internal control system of every corporation has the similar control and other ethical standards are according to the same law. Therefore, in case of mutual contracts or ventures, it becomes easier for the directors of each company to comply with the other organization. The similar standards for the ethical behavior and the governance of the organizations assist the directors to incorporate with the other organizations easily and quickly. Therefore, the positive impact of Sarbanes Oxley Act 2002 in the United States of America is that it is increasing the trend of joint ventures in the small and medium size corporations. (Wagner, 2006)
Another impact of Sarbanes Oxley Act 2002 is the United States of America is that only the government is in the position to make and amend the laws written in the Sarbanes Oxley Act 2002 regarding the governance of the corporations. In case of any new issue arises regarding the governance of the corporation, the government makes the laws. However, in other parts of the world, the corporations adopt the rule based approach which suggests that the corporation must act and behave according to the general law and perform their business to the best interest of the general public. However, the element of compliance in the Sarbanes Oxley Act 2002 is low and the government makes new rules or amends the rules according to the local and global changes. The main advantage of Sarbanes Oxley Act 2002 is that it does not allow the directors of the corporations to modify and adopt the governance laws according to their needs or desires. (Wagner, 2006)
Another main advantage of the Sarbanes Oxley Act 2002 is that it is economical for the organizations to make it as their governance code. It is a huge impact on the business sector of the United States of America. Before Sarbanes Oxley Act 2002, the companies were spending thousands of dollars to other companies and individuals to make, modify and update their corporate governance code to maximize the trust of their shareholders. The Sarbanes Oxley Act 2002 eliminated this expense and standardizes the corporate governance code in the entire United States of America. Therefore, the Sarbanes Oxley Act 2002 is cost effective for the corporations. Moreover, the new business or the small businesses in the United States of America are adopting the Sarbanes Oxley Act 2002 as their corporate governance code in the original form to reduce their expenses. (Wagner, 2006)
Another important impact of Sarbanes Oxley Act 2002 in the markets of United States of America is that the Sarbanes Oxley Act 2002 does not allow any flexibility to the corporations in the compliance and overseas trading. This impact of Sarbanes Oxley Act 2002 has its advantages and disadvantages as well. The main advantage is that it reduces the manipulative decisions of the directors and reduces the self interest of the directors. However, the main disadvantage of adopting the Sarbanes Oxley Act 2002 is that there are very few countries in international trade who are following rigid laws of corporate governance. Therefore, in these circumstances, the Sarbanes Oxley Act 2002 is a hurdle between the overseas investments and trade for the companies registered in the United States of America. The Sarbanes Oxley Act 2002 is the word of law and has rigid rules; therefore, the management of the business is forced to make very illogical decisions due to the stiffness of the laws of Sarbanes Oxley Act 2002. (Wagner, 2006)
The Sarbanes Oxley Act 2002 has its impacts on the global markets as well. In last few decades, the most of the international trade of the United States of America is either arms export, the quota system and under the rules of WTO. Moreover, most of the largest financial frauds were happened in the corporations registered in the United States of America. Therefore, in these circumstances, the only positive signal for the investors is that the government of the United States of America is implementing strict rules for the governance of the corporations. However, due to the strict rules and rigid laws of the Sarbanes Oxley Act 2002, the common investor is not investing his funds in the financial markets of the United States of America. The bilateral trade between the corporations from United States and other overseas company is becoming difficult due to the rigid laws of Sarbanes Oxley Act 2002. The element of non compliance between the governance laws of overseas countries is making barriers for the international joint ventures. Therefore, in these circumstances, the government must change the rules of Sarbanes Oxley Act 2002 and include the element of flexibility to increase the confidence level of overseas countries. Otherwise, it will become difficult for the United States of America to sustain as a global economic power in the presences of APEC, European Union and other economic blocks in the world. In these circumstances, the government of United States of America must allow the corporations to adopt the rule based approach to allow the investment from the small investors in the United States of America. The countries in Europe such as United Kingdom, France, Germany and Russia are using the rule based approach to maximize their bilateral trade to maximize the profits. (Engel, Hayes & Wang, 2007)
The impact of Sarbanes Oxley Act 2002 in relation to the accounting profession is very important for the economical progress of the United States of America. The proper implementation of the accounting standards in the annual financial statements of the corporation is the core area of the Sarbanes Oxley Act 2002. The accounting standards followed by the corporations in the United States of America are Generally Accepted Accounting Standards (GAAP). The Sarbanes Oxley Act 2002 forces the corporations to produce their accounting statements according to the standards of GAAP and disclose it accordingly. Therefore, in these circumstances, the role of accountants has increased due to the sensitivity of their duties and responsibilities. The main and core area of the Sarbanes Oxley Act 2002 is the ethical behavior of the individuals and the accountants are the most important employees of any organization. Therefore, it is the responsibility of the accountants to perform their job duties, according to the codes of Sarbanes Oxley Act 2002. In case of any misstatement of pressure from the management of the organizations, they must disclose it to the non executive directors or the internal control department of the organization. For the accountants, it is very easy to find a loop holes in the accounting standards which ultimately becomes a reason of a financial frauds. Therefore, to reduce the loop holes in the accounting standards of GAAP, the government and the regulation body must reduce the number of standards in the GAAP. It is in a view that the GAAP standards are normally define any one issue related to the business operations. It is very important to reduce the number of standards in the GAAP to maximize the transparency and the ethical governance of the organizations. (Ge & McVay, 2005)
Another main issue with the compliance of the accounting standards is that the most of the economically strong countries are using the International Accounting Standards (IAS) such as United Kingdom and Gulf countries. Therefore, in these circumstances, the Sarbanes Oxley Act 2002 must allow the element of compliance to estimate the performance of overseas companies. The local investor in Europe cannot read the financial statements prepared according to the GAAP standards and the United States of America loss the potential investment due to the different accounting standards. Therefore it is very important to make new accounting standards for the corporations in the United States of America to maximize the overseas investment in the financial markets of the United States of America. (Zhang, 2007)
The technology is playing an important role in the progress of the businesses all over the world. The businesses are depending on the technology heavily these days because it had increased the business by reducing the time wastage. For example, the official document can be emailed instead to sending via mail which delays the business operations. Similarly, the checks at the workplace are also using the technology and improving the efficiency of the businesses. However, the Sarbanes Oxley Act 2002 suggests that the organizations must have a proper internal control over the information technology assets they have. For example, if the organization is using the card swapping machine to check the attendance of the employees, then there must be an individual at the machine who identifies the individual with the proper and valid ID card issues by the organization. Similarly, the bar code system must be up to date and the internal control department of the business must check the inventory control system on the weekly basis to insure that the systems are working accordingly. The Sarbanes Oxley Act 2002 suggests that the businesses must have a separate or a backup database of all the information they have. In case of any emergency, it is very important that the organization secure their data. For example, after the attacks of 9/11 in the United States of America, it was decided that the companies must maintain their database at the separate location to insure that the investment of the shareholders are safe. In the incident of 9/11, a lot of companies lost their entire database and shareholders lost their investments in those companies. Therefore, the Sarbanes Oxley Act 2002 suggests that the companies must maintain their database, either in electronic form or in a paper form at different places. (Iosub, 2003)
References
The Costs And Benefits Of Sarbanes-Oxley. (n.d.). Retrieved November 24, 2014, from
http://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/
Slaughter, J. (n.d.). The Impact of the Sarbanes-Oxley Act on American Businesses. Retrieved
November 24, 2014, from http://smallbusiness.chron.com/impact-sarbanes-oxley-act-american-businesses-1547.html
Iosub, J. (2003, March 19). What the Sarbanes-Oxley Act means for IT managers. Retrieved
November 24, 2014, from http://www.techrepublic.com/article/what-the-sarbanes-oxley-act-means-for-it-managers/
Wagner, S. (2006, April 1). The Unexpected Benefits of Sarbanes-Oxley.
Retrieved November 24, 2014, from https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
Romano, R. (2005). The Sarbanes-Oxley Act and the making of quack corporate governance.
Yale Law Journal, 1521-1611.
Ge, W., & McVay, S. (2005). The disclosure of material weaknesses in internal control after the
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Zhang, I. X. (2007). Economic consequences of the Sarbanes–Oxley Act of 2002. Journal of
Accounting and Economics, 44(1), 74-115.
Engel, E., Hayes, R. M., & Wang, X. (2007). The Sarbanes–Oxley Act and firms’ going-private
decisions. Journal of Accounting and Economics, 44(1), 116-145.
