Sarbanes-Oxley Act of 2002 Administration As Also Essay

Excerpt from Essay :

Sarbanes-Oxley Act of 2002

administration as also a majority of other western administration witnessed the collapse of corporate giants like Enron & Worldcom in the aftermath of noticeably fraudulent executive actions of these companies. This led to shareholders losing confidence and stringent laws was felt necessary in the form of new legislation to avoid repetition of Enron and Worldcom like incidents. The then President George W. Bush entrusted Senator Paul Sarbanes and Congressman Mike Oxley to come up with stringent new laws which would arrest or at least diminish probability of corporate scandals from repeating which came to be known as the Sarbanes-Oxley Act, of 1992. (Holt, 2008)

Key components of SOX Act covered under major Sections of the Act:

Sec 406 of the Act mandates every senior Financial Executive to be signatories of a Code of Ethics. Sec 409 mandates that companies make adequate disclosure regarding material financial alterations in the company's state of affairs in a speedy and timely way. Sec 802 and 1101 forbids changing, damaging or falsification of any document with the motive of hampering the investigation of any matter within the control of any agency of U.S. administration making it important to preserve, document and archive all records. Sec 806 & 1107 are sections governing whistleblower protection. Sec 807 contains shareholder defrauding penalties that might be associated with backdating matters in case they were not done properly in the first place. Sec 906 contains the requirements of reports at regular intervals ensuring it has all the material information. (Holt, 2008)

Let us understand the primary objective of the Act. The SOX Act's primary objective is that, every public company that is listed on a U.S. Exchange or has in excess of 300 U.S. shareholders, in case of foreign company, must be SOX Act compliant. SOX Act is only compulsory in case of reporting or public corporations. Besides, the effects of SOX are having an extensive impact on private companies as well as small businesses. The primary need is because of the fact that there is an immense public consciousness of the requirement for good corporate governance on every company interactions. Banks, lending intermediaries, accountants, Govt. contract issuers and shareholders in case there are any who are desirous to be aware of knowing that the company they are doing business with are acting in an ethical manner. They also want to know if the management has full knowledge about the functioning of the company and some type of internal control mechanism is in place. (Holt, 2008)

The reporting mechanism is precise and truthful and the management owes complete responsibility of the outcomes of the activities of the company. As a part of the SOX, every person in the management must comprehend and be signatory to a Code of Conduct which is able to instigate confidence and trust both at the internal as well external level of the company. Besides, it is also pertinent to entrust somebody as an internal auditor and as a Compliance Manager who will be the watchdog of the company guaranteeing that the Policy and Procedures are adhered to and the rules and expectations of governments as also other regulators are observed. He can also be designated as the whistleblower and he should be in possession of definite instructions as well as authority to handle situations in a correct and efficient manner. (Holt, 2008)

An appropriate Internal Control System needs that a fixed set of rules or procedures are set up in concert with a system of guaranteeing that they are observed which is the work of an internal auditor. The company must have at least an independent Director on Board. In a lot of situations it was observed that in case of illegal actions, a Director be it company or independent was defended from personal liability for errors or mistakes in judgment when they wee able to prove that they had employed normally cautious business judgment. In case the company is issuing shares for the public, or planning for a Merger & Acquisition, corporate loans to insiders must be called in. (Holt, 2008)

It is often problematic to clear them from books quickly, especially in case they are of long-term nature. It is always important to employ a documentation manager. The person will ensure that every document records and transactions, financial documents, communications or any other types of documents are accurately preserved and filed and are accessible at the time of its need. This is because during times of problems, availability of concrete paper trail prevails over all. And paper currently covers electronic communications also. (Holt, 2008)

(2) Criticisms surrounding the Act

Despite the sweeping changes ushered by SOX, it has been receiving its share of criticism. There has been a feeling among the financial executive community as per a survey described in CFO magazine that the cost of compliance outweighs the benefits outlined in the SOX. The academic and business community emphasize that some of the SOX's most important provisions provide miniscule or absolutely no safeguard to investors and the associated high costs placed on companies to conform to the provisions of SOX. The Act's leading objective is increasing investor confidence, but the 'compliance by checklist' method in connection with disclosure and corporate governance might give guarantee that a company is adhering to the rules although it is contentious if the investors stand to gain from the same. (Wade, 2008)

It has been felt that the lawmakers and regulators must discard the present insider trading laws. But equally persuasive arguments are there which favor the insider trading ban. Likewise in connection with a lot of corporate governance practices, compelling arguments are there which states that a specific practice is good and equally convincing arguments exists that the identical procedure has not been able to improve the enterprise's performance or governance. These are prominently demonstrated by some of the incongruities associated with some of the SOX's important provisions. (Wade, 2008)

It is an absurdity that businesses which were most aggressive in manipulating earnings were the companies which profited the maximum from the provisions of SOX. Even though SOX appears to have reinstated some of the investor confidence, nevertheless according to some research it might not be the case. For instance, SOX Sec 301 mandates that each member of an audit committee should be independent. Experimental research nevertheless is unable to prove irrefutably that an audit committee established completely by independent directors really improves the performance of the company. It is doubtful whether an audit committee comprising of independent directors will help in reduction of accounting wrongdoings. Therefore Audit Committees set up after SOX might not get increased investor confidence. SOX's tackling of insider trading is also debatable. A lot of disagreement exists whether SOX improves company's performance, betters the quality of financial disclosure or helps in investor protection. (Wade, 2008)

There have been complaints that SOX's corporate governance provisions are unable to deal with the problems that resulted in the infamous accounting fiascos during 2001 and 2002. It has also been claimed that the Act highlights on petty issues like the person having access to office keys while sufficient importance has not been accorded to issues regarding the person having access to financial data. Several people of this genre arrive to the conclusion that SOX will not be able to protect investors from financial fraud at the corporate level in future, depending in experimental research which point out that some of the changes in corporate governance under the Act will not be able to dissuade fraudulent financial reporting. There does not seem to be any meaningful coherence between some of the Act's most important Sections and enhanced performance of the company. (Wade, 2008)

Besides, there is a lack of correlation between the provision of non-audit services and quality of audit. Likewise in respect of Sec 402(a) and Sec 302 it can also be similarly argued. Sec 402(a) forbids public companies which are not financial institutions from making loans to executives which was framed to avoid unavoidable disagreement among the interests of executives and the interests of the enterprise on behalf of whom they are working. But experimental researchers advocate that executives raise their equity investment in their enterprises after getting firm loans. These equity purchases assist in aligning the interest of the executives with those of the company and its shareholders. Thus there is a lack of unanimity regarding the effectiveness of Sec 402(a) as an instrument that safeguards investors. Moreover, under Sec 302, Chief Executives and Chief Financial Officers should confirm as regards the exactness, nevertheless experimental research results show a variance if executive certification gives investor with any material information or benefit. (Wade, 2008)

(3) Economic consequences if any for companies as a result of implementing the Act:

Regardless of the claimed advantages of SOX, it has often been noted that speedy legislation of the Act was done for gaining political mileage. As the Bush administration was drawing flak from the Democrats for soft-pedaling on corporate swindles in…

Sources Used in Document:


Coates, John C. (2007) "The Goals and Promise of the Sarbanes-Oxley Act" Journal of Economic Perspectives, vol. 21, no. 1, pp: 91-116.

Holt, Michael F. (2008) "The Sarbanes-Oxyley Act: Costs, Benefits and Business Impact"

CIMA Publishing.

Mehera, Madhav. (n. d.) "Sarbanes-Oxley Three Years On" Retrieved 9 May, 2012 from

Cite This Essay:

"Sarbanes-Oxley Act Of 2002 Administration As Also" (2012, May 11) Retrieved February 24, 2020, from

"Sarbanes-Oxley Act Of 2002 Administration As Also" 11 May 2012. Web.24 February. 2020. <>

"Sarbanes-Oxley Act Of 2002 Administration As Also", 11 May 2012, Accessed.24 February. 2020,