Sarbanes-Oxley Act was enacted in the year 2002 in response to financial malpractices among the corporations in the United States of America. The Act led to significant changes in corporate governance and financial practices as a way of reducing frauds prevalent in the financial sector. There were a myriad of factors that interacted to form a culture and suitable conditions, which led to a series of corporate frauds between the year 2000 and 2002. These factors were closely analyzed, and their root causes necessitated the enactment of Sarbanes-Oxley Act in 2002. This paper analyses the pre-Sarbanes-Oxley Act and post- Sarbanes-Oxley Act to analyze the positive outcomes of the Act.
The Act of Sarbanes-Oxley is divided into eleven sections. The first section consists of nine clauses, which provide for the oversight board of public sector accounting. Other sections include auditor independence, corporate responsibility, financial disclosures, conflict of interest, resources and authority of the commission, tax returns, and fraud accountability. The Corporate and Criminal Fraud Accountability describes the penalties for manipulation and destruction of accounting records. The Act also contains a section of White Collar Penalty Enhancement, which criminalizes failure to certify financial records and describes specific penalties for conspiracies and white-collar crimes.
Prior to the year 2002, there were no clear guidelines on how to compensate the executives and corporation managers. As a result, company managers set exorbitant compensations for themselves. The executives engaged in creative accounting to support their claim for excessive remunerations. Managers took advantage of stock options to manipulate their pay. This resulted to major accounting scandals and financial crises arose, which further led to bankruptcy of many corporations. The management-shareholder agency relationship turned out to be hostile. There were a series of conflicts between the executives and company owners. The Senate came up with Sarbanes-Oxley Act to remove the weaknesses that existed in the accounting systems and institute proper measures to control further frauds.
In the aftermath of Sarbanes-Oxley Act, many companies saw major improvements in the accounting and corporate management. Financial analysts have argued that the Act reduced disruptions and abusive compensations that existed before the year 2002. The Act limited loans to executives and provided for recovery of profits which the executives realized during periods of economic recession. Section 306 illegalized any transactions by executives during bad economic periods. Since its adoption, salaries and remuneration to the companies’ management have declined considerably. Section 402 prohibits any grant of personal loans to the management. The culture of managers taking the opportunity of factors beyond their control and reward themselves heavily has declined considerably. Managers and executives have been in the fore front to oppose the Sarbanes-Oxley Act since it is negatively affecting their interests. Proponents of the Act have cited many benefits of it, both to companies and general economic development.
Many critiques have cited weaknesses of Sarbanes-Oxley Act. The opponents of the Act argue that the Sarbanes-Oxley Act was an unnecessary and expensive burden in the United States financial sector. They have argued that the Act led to reduction in the Initial Public Offers in the year 2008 and deregistered foreign firms in the US market of foreign exchange. The Wall Street Journal pointed out that the Act has not instituted fairness nor reduced financial frauds. Further analysis of financial trend has revealed that there was a decline in the number of Initial Public Offer in the year 2001 before the enactment of Sarbanes-Oxley Act, and increased by 195 % in 2004. Therefore, the Sarbanes-Oxley Act cannot be blamed for bad business climate. The Act has enhanced the financial sector and restored corporate transparency in the United States of America.
