Sarbanes-Oxley Act (SOA) Was Put Into Law

Sarbanes-Oxley Act (SOA) was put into law in 2002 following the revelations that Enron (and Enron's accountancy Arthur Anderson), WorldCom, and other corporations were using blatantly corrupt practices in accounting and causing huge losses for stakeholders in those firms. Moreover, the U.S. Congress could not simply stand by and allow companies to use unethical and illegal practices to scam huge sums of money for corporate executives while stripping the IRAs and other savings plans for stakeholders. Basically, the SOA was legislation that attempted to stop this aspect of corporate fraud: the illegal accounting practices that were in place and resulted in the collapse of WorldCom, Enron, and other firms.

What specifically does the Sarbanes-Oxley Act set out to do?

It is an understatement to say that there were major chances needed to the regulation of financial practices in corporate America. And following the investigations into corrupt practices at Enron, et al., U.S. Senator Paul Sarbanes and Congressman Michael Oxley created legislation to address this embarrassment to the business community. In the introduction to the SOA the authors state that compliance with the legislation "…need not be a daunting task" and yet it must be "…addressed methodically" (www.soxlaw.com).

The Section 302 of the Act details what certifications must be completed for each corporate financial report. Financial reports must: a) not have any "…material untrue statements or material omission or be considered misleading"; b) represent the financial condition "fairly"; c) have the signatures of the officers indicating they verify the findings; d) list deficiencies in the company's internal controls; and e) report factors that may negatively impact internal controls (www.soxlaw.com).

Sections 401, 409, and 802, considered pretty much the nuts and bolts of the Act, basically requires reporting agencies to be honest and forthright in their disclosures. Section 802 spells out the punishment for "…altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation" -- and that is fines and/or "…up to 20 years imprisonment" (www.soxlaw.com).

Some of the lines in the Act seem a bit pedestrian, awkward or perhaps condescending. For example, in Section 401 the narrative reads: "Financial statements are published by issues are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information" (www.soxlaw.com).

Also, under "Miscellaneous," the Act offers this important tip to accountants who may be required to file under SOA: "Perhaps the most important statement on the entire web site: don't put off until tomorrow what can be done today!"

Four quality resources review the SOA

Meanwhile, professor Richard Orin of the University of Missouri-Columbia writes in the peer-reviewed Journal of Accounting, Auditing & Finance that after five years, the SOA does have its critics -- mainly complaining about the "…out-of-pocket costs of compliance" (Orin, 2008, p. 143). However, Orin believes SOA has made "…inroads against unethical practices"; he backs that statement up with the results of a survey he took of thirty-nine "…randomly selected corporations" (143).

Orin explains that "…92% of the corporations in the survey had adopted codes of ethics" that indeed satisfied the primary regulations set down by SOA (143). Moreover, Orin writes that he found that "…careful thought and attention was consistently paid to the particular ethical conundrums of our times" (143).

A peer-reviewed article in the International Journal of Economics and Finance reports that that the Act has indeed "…received a great deal of critique," which mainly focus on the high compliance costs associated with SOX" (Verleun, et al., 2011). In fact researchers into the SOA compliance issues report that many companies -- after "empirically assessing" options -- have decided to "…delist from the stock exchange in an attempt to avoid SOX compliance" (Verleun).

The authors posit that there can be "…high social costs" when a company decides to go private; in the first place, staying public allows firms the benefit of raising "more funds" and moreover investors benefit from staying public because they have the opportunity "…to diversify their investment risk" (Verleun). Additionally, Verleun continues, firms going private allow that "…a lot of information is lost for the market which is caused by lower level of required disclosure transparency." The authors offer a third reason why firms should not desert the public milieu, and that is because "…public ownership leads to positive social externalities" which could be lost to the stakeholders once a firm decides going private is a better idea (Verleun).

In general, Verleun and colleagues in this article point out that subsequent to the passage of SOA, firms are much more conservative in their accounting and reporting of earnings. Indeed high-tech firms have shown a greater degree of accounting conservatism than "low-tech firms." Two reasons for that could be because: a) "…the higher volatility of high-tech stocks makes these firms more vulnerable to shareholder litigation"; and b) high-tech firms seem to attract more attention from analysts "…because of their high growth potential" and hence that is an incentive to report "…more prudently" (Verleun).

In their conclusion the authors of this article posit that their findings can be "useful in the process of developing a decent regulatory reaction to the current crisis the financial world is suffering." The paper they produced provides "…empirical evidence" that there has been an increase in accounting quality"; however, the improved ethical aspects of the accounting industry have not prevented the current financial emergency, they conclude.

As for author Debra DeVay, she writes that one negative result of SOA is the "…rising costs to corporations to comply with the legislation, especially the internal control standards of SOX" (DeVay, 2006, p. 5). The author explains that several large American corporations are alleging that the rules in the Act are supposedly "…aimed at improving shareholder trust" but in reality the rules are "…hurting shareholder returns" (5). Another gripe DeVay reports comes from foreign companies that were listed on the U.S. stock market have taken themselves off the list so they won't have to comply with SOA. In fact DeVay writes that in 2000 there were 50 foreign companies on the stock market; by 2003 that number had dwindled to 19 (5).