At a time when the corporate financial sector was faced with issues of malfeasance, Sarbanes-Oxley Act was enacted in a bid to restore the confidence of the public in corporate financial statements. Before this period, the public disclosures had suffered massive misappropriations characterized by inaccuracy, and inadvertent unreliability. It thus became essential for the government to act so that there would be a proper end to the rising cases of accounting fraud (Lee et al. 733-74). Many stakeholders in the industry had become part of a broad scheme that thrived in the unaccountable corporate segments that spewed fraudulent activities through accounting. Both the board members and the company executives had become entangled in massive financial scandals that led to the collapse of several large corporations thus leading to public outcry. The impact of SOX was felt in both negative and positive aspects regarding the solution offered by fraudulent activities.
Positive impacts
Enhanced financial information reliability-With the main objective being to restore confidence in financial statements, SOX lived to this expectation for quite sometimes. Regarding the reliability, SOX created internal control so that it would increase the generation of reliable financial information by the public companies. In this regard, it became essential for companies to comply and make the information meant for public consumption more reliable. According to studies, the disclosure of financial information had a devastating effect on the companies especially if it was deficient.
Strengthened Corporate Governance-It is essential for public companies to have strong corporate governance so as to increase the levels of employee discipline as well as provide a tacit structural orientation of the company (Carlson & Leonard 8-17). Several studies reveal that several companies improved their corporate governance to about 10% due to the implementation of SOX. It thus created the culture of discipline and ethical mannerism among employees in the corporate sector thus increasing the creativity.
On the other hand, SOX made corporate life so difficult for the emerging and small companies. It presented a plethora of challenges to the companies thus creating a business buffer that made hard to sustain the escalating costs of doing business as a public company. Consequently, several companies contemplated privatization as a way to evade the costly business models created by SOX (Carlson & Leonard 8-17). It was then characterized by poor returns thus making many smaller companies detest joining public sector.
Negative impacts
Escalated cost of compliance
The costs of complying with the new set of regulations as ascribed in SOX became unbearable to many companies. It is critical for every company to operate in an environment where making profit is not an illusion but rather a realistic goal. However, the American market suddenly became unbearable to all companies based in the US. Several aspects of costs inflicted on the companies included; personal liability obligations, financial market costs, and internal improvement costs (Carlson & Leonard 8-17). The compliance issues escalated the costs of operating the accounting services and auditors became the receivers that further increased the services.
Liability obligations
The Act created additional costs on the auditors through personal reviews, firms to be rotated while the smaller firms also required undergoing these reviews in every three years. It increased the costs auditing and the operation costs of auditors thus making it difficult to conduct business (Lee et al. 733-74). It required that outside lawyers are hired for advisory services that created an additional legal fee on companies thus making it costly to operate in the market.
Increased financial markets cost
The costs of the operating the exchange markets became increasingly high due to the limitations of SOX through unhealthy certification requirements by SOX Act thus making easy for companies to deregister from the financial markets or go private. Acquisition of public companies also increased in cost to foreign companies thus making it difficult to operate within the market (Lee et al. 733-74). The situation affected investors, markets, and economic growth both in the short term. Due to the unsustainable obligations, many companies opted to exit the public markets. Consequently, the economy would suffer directly due to reduced investments and fear of potentially minimized funding (Carlson & Leonard 8-17). Companies that could not comply also suffered through reduced shareholder funding due to escalated costs of operations that limited the profits thus making it hard to invest.
Work Cited
Lee, Edward, Norman Strong, and Zhenmei Judy Zhu. "Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?" Journal of Accounting Research 52.3 (2014): 733-74. Web.
Carlson, Jonathan W., and Leornad P. Basak. "The Effects of the Sarbanes - Oxley Act: A Deeper L ook Into Its Impact on Small Companies." (2011): 8-17. Web. 6 Apr. 2016.