SOX The Sarbanes-Oxley Act (SOX) was passed in 2002 as a response to a wave of corporate accounting scandals. To measure the effectiveness of SOX over the past ten years, the objectives of the Act must be understood. The text of the Act states that its purpose is "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes." The accounting scandals of the late 1990s and early 2000s had undermined public confidence in the U.S. securities system, because investors were beginning to feel that the information contained in the financial statements could not be trusted. Congress felt compelled to address this situation by passing Sarbanes-Oxley, which creates more legal controls over the financial statements, creates an enforcement body (the Public Company Accounting Oversight Board) and creates new safeguards.

Small (2011) examines the effectiveness of SOX in improving the quality of internal control reporting. The findings of this study are that the "majority of sample firms and their auditors fail to report existing control weaknesses and instead report that controls are effective." The author notes that internal control reports are useful for investors because they provide advanced warning of the likelihood of misstatements in the financial reports.

Hansen (n.d.), in a study of court cases involving SOX, found that the Act "does not lead to positive governance policies enforced in the courts." This points to an issue with the implementation of the Act, in particular with the ability of the Act to be enforced in the nation's legal system. If the Act is not enforced very well, that might explain Small's finding that companies are unwilling to implement the more stringent components of the law. While a reduction in major corporate accounting scandals since the passage of SOX is certainly beneficial and restores investor faith in the financial system, any law is only as good...

In practice, it remains a somewhat flawed piece of legislation. One way to improve SOX is to build in stronger enforcement mechanisms. Small's point about disclosing weakness is a good one, since many accounting frauds start out with a company unwilling to disclose its weaknesses -- Enron for example. If that culture still persists, then SOX has not done its job at improving the types of disclosures that investors rely on.
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One of the key provisions of SOX was the creation of the Public Companies Accounting Oversight Board (PCOAB). The PCOAB has jurisdiction over the auditing function at public companies, and creates standards for external auditors. This came about as the result of the failure of external auditors to correctly address issues of fraud. Conflicts of interest occurred because the external auditors would normally also have consulting relationship with their auditing clients. That the consulting business was more lucrative created an incentive to minimize the importance of the auditing function.

SOX and the PCAOB have restored the auditing function to its former role. External auditors may not have conflicts of interest with their auditing clients. The auditing role has therefore become far more important post-SOX than it was pre-SOX. The PCOAB is responsible for registering and inspecting auditing firms (Goelzer, 2004) and this function can create a higher level of investor confidence in the auditing system in general.

Auditing firms are now subject to considerably more oversight. The public accounting profession has also been strengthened by SOX. The removal of the conflict of interest with the consulting services allows for accountants and auditors to have the freedom to do their jobs without submitting to pressure from other parts of the company that want to keep clients…