Sarbanes-Oxley Act Research Paper

Length: 5 pages Sources: 5 Subject: Business Type: Research Paper Paper: #16108931 Related Topics: Board Of Directors, Lawyers, Corporate Finance, Behavior Modification
Excerpt from Research Paper :

¶ … Sarbanes-Oxley Act is a mandatory act passed in 2002. The legislation introduced significant modifications to the regulation of corporate governance and financial practice. The act was named after Senator Paul Sarbanes and Representative Michael Oxley. They were the main architects of the legislation as well as the ones who set several of the mandates for compliance. There are eleven titles arranged within the act with compliance emphasized in sections 302, 401, 404, 409, 802, and 906. The Sarbanes-Oxley Act also brought establishment of an over-arching public company accounting board.

The Sarbanes-Oxley Act of 2002, along with altered exchange listing requirements, enforce uniformly high levels of external director supervision of all companies. Nevertheless, research indicates corporate governance structures comprising of board of directors and so forth, are elected endogenously by companies as a response to their singular contracting and operating settings. Utilizing the relative benefits and expenses of external director supervision as a benchmark, one can locate major cross-sectional nuances in the effects of wealth surrounding the announcement and passing of such regulations and standards. What this means is, companies that incur high supervision expenses and less benefits from external supervision, were the ones that benefitted less from the act. Specifically, firm age and size is positively associated to the passing of these regulations negatively associated to opportunities in growth and uncertainty of the company's operational setting as related to wealth effects. As an article by Wintoki suggests: "The results suggest that a blanket "one size fits all" governance regulation maybe detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor." (Wintoki 229)

Some research concerning a study on the impact of the Sarbanes-Oxley Act of 2002 along with other modern reforms on boards and directors, directed by their impact on the directors' supply and demand, suggests SOX has had a negative effect on the workload and risk (increasing both respectively) by reducing the supply and augmenting demand throughout the mandate that more firms have an increase in external directors. Firm size brought on both cross-sectional and broad-based modifications. Among these modifications is, board committees have an increase in meetings post-SOX as well as doubling of insurance premiums for Director and Officer. Directors, after the passing of SOX, are now more likely to be consultants/lawyers, retired executives, financial experts, and so forth. Less likely to be directors are current executives. Also, post-SOX generated bigger and more independent boards. As Link concludes: "Finally, we find significant increases in director pay and overall director costs, particularly among smaller firms." (Linck 3287)

To further evaluate the Sarbanes-Oxley Act one must look at the literature surrounding the efficacy of the act as well as the origins. As Romano states, the act was ill conceived. "SOX's corporate governance provisions were ill conceived. The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amid a free-falling stock market and media frenzy over corporate scandals shortly before midterm congressional elections."(Romano 1521) During the end of the legislative process within the Senate, governance provisions were introduced, becoming less of a focus. The interaction of the Senate Banking Committee or SBC's chairman and the election-year politics was stirred on by the interests of policy entrepreneurs which then began the inclusion and creation of SOX. Any literature that opposed the suggestions brought on by the creation of the act were not brought to the attention of Congress until much later and in fact were ignored whenever such information was referenced. Unfortunately this kind of decision-making is not a singular occurrence within Congress. "Much of the expansion of federal regulation offinancial markets has occurred after significant market turmoil. The Article concludes that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional." (Romano 1521) Essentially, SOX is considered a mistake. To help mitigate future mistakes of this nature, crisis-mode/emergency legislation must provide re-assessment at a future date when congress can perform further deliberation.

As was mentioned previously, numerous firms were affected by the passage of SOX. In fact, some public firms made the decision to go private. A study...

...

Their findings reveal: "(1) the quarterly frequency of going-private transactions has increased after the passage of SOX, and (2) abnormal returns surrounding both the passage of SOX and the going-private announcement are significantly related to proxies for the costs and benefits of SOX and the net benefits of being a public firm." (Engel, Hayes and Wang 116) Negative effects happened as a result of SOX and several articles and studies point to this. Not only was there an effect on expenses and a lessening of certain benefits, but also the decisions of companies were effected as well, clearly shown in the study.

However, there are some positive aspects from the aftermath of SOX. SOX has had a positive effect/impact on the voluntary disclosure concerning the data security activities of firms. "These findings provide strong indirect evidence that corporate information security activities are receiving more focus since the passage of SOX than before SOX was enacted." (Gordon et al. 503) Although there are several noted negative impacts concerning major company decisions and change in type of directors elected, there is some positive influence brought on by the so called, "ill conceived" act. Enhanced disclosure is important and crucial in an assessment of a company. Therefore the act has had some positive aspects and was not a complete waste to devise and pass.

In conclusion, both negative and positive aspects were discussed concerning the impact SOX has had on American companies. Although the negative outweighs the positive, it was not and has not been a complete waste. Increased disclosure helps regulate businesses and allows for more supervision. Furthermore SOX and acts like this in the future must be carefully reflected upon before implementing. Congress in the past, has made many mistakes concerning passing legislation. Just like there was increased disclosure due to the passing of SOX, there should also be increased disclosure in congress. Without which people cannot properly deliberate over and reflect upon possible errors or lapses in judgment. It is not to say the SOX act was a complete waste of time and energy, however it could have been better conceived. People must realize the more effort is put into an act or any kind of legislation, the more chances it will have to be well received as well as better implemented. In all certainty, there were more negative effects of SOX to American companies, then there were positive.

References

Engel, Ellen, Rachel M. Hayes, and Xue Wang. 'The Sarbanes-Oxley Act And Firms' Going-Private Decisions'. Journal of Accounting and Economics 44.1 (2007): 116 -- 145. Print.

This is a journal article that deals specifically with the decision of companies to go private following the passing of SOX. It details why these companies went private, suggesting there was negative effect brought on by the passing of SOX. Specifically, due to less control concerning monitoring. This in part was the main reason why public companies decided to go private, to gain back some of that control.

Gordon, Lawrence A et al. 'The Impact Of The Sarbanes-Oxley Act On The Corporate Disclosures Of Information Security Activities'. Journal of Accounting and Public Policy 25.5 (2006): 503 -- 530. Print.

This article deals with the impact of SOX. Most the impact was said to be negative as it produced less benefits for companies and less control. However there was some positive effect in the sense that there was more disclosure on the part of companies. More disclosure meant higher levels of transparency and more chances for better regulation of businesses. Although it could be perceived as a negative effect by companies, in general it is a positive one brought on by SOX.

Linck, James S, Jeffry M. Netter, and Tina Yang. 'The Effects And Unintended Consequences Of The Sarbanes-Oxley Act On The Supply And Demand For Directors'. Review of Financial Studies 22.8 (2009): 3287 -- 3328. Print.

The article explains the shift in the type of directors following the passage of SOX, more specificially, instead of current executives, lawyers and retired executives were brought in. This meant there was less power given to current executives and there was an increase in external monitoring. Businesses sometimes fear losing control through external influences. The change in director types fuels this.

Romano, Roberta. 'The Sarbanes-Oxley Act And The Making Of Quack Corporate Governance'. The Yale Law Journal 114.7 (2005): 1521. Web. 30 Oct. 2014.

This article reflect the mistakes and creation behind SOX. It discusses how these blunders impacted the formation and passing of SOX as well as how to avoid these kinds of acts in the future. It labeled SOX as ill conceived and regarded such behavior as irresponsible. It is more of a commentary piece and…

Sources Used in Documents:

References

Engel, Ellen, Rachel M. Hayes, and Xue Wang. 'The Sarbanes-Oxley Act And Firms' Going-Private Decisions'. Journal of Accounting and Economics 44.1 (2007): 116 -- 145. Print.

This is a journal article that deals specifically with the decision of companies to go private following the passing of SOX. It details why these companies went private, suggesting there was negative effect brought on by the passing of SOX. Specifically, due to less control concerning monitoring. This in part was the main reason why public companies decided to go private, to gain back some of that control.

Gordon, Lawrence A et al. 'The Impact Of The Sarbanes-Oxley Act On The Corporate Disclosures Of Information Security Activities'. Journal of Accounting and Public Policy 25.5 (2006): 503 -- 530. Print.

This article deals with the impact of SOX. Most the impact was said to be negative as it produced less benefits for companies and less control. However there was some positive effect in the sense that there was more disclosure on the part of companies. More disclosure meant higher levels of transparency and more chances for better regulation of businesses. Although it could be perceived as a negative effect by companies, in general it is a positive one brought on by SOX.


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