I am strongly convinced that a reduction in the requirements of the Sarbanes Oxley (SOX) Act would be in the best interest of the economy. Often, I have been ambushed for raising such an opposing argument. People believe that the SOX Act was appropriate in snipping out corporate misconduct by greedy individuals whose objective was to fatten their accounts at the expense of the shareholder. They argue that the passage of the Public Company Accounting Reform and Investor Protection Act of 2002 or what is commonly known, as the SOX Act was indeed timely. It was a swift response to the scandals of blue-chip companies such as Enron, Tyco International, and WorldCom. These companies were conducting massive accounting fraud. Investors’ trust and confidence in company practice were greatly eroded. The foreign corrupt practices act (FCPA) that required companies to disclose detailed accounts records and maintain internal accounting controls had failed in curbing the problem of embezzling public funds. Hence, the need for the US Federal law to come up with a remedy to prevent such scandals from being repeated.
I have no qualms about the importance of the SOX Act and I do not advocate for its removal. With all the corruption and fraud cases still going on without people’s knowledge, I would hate to think of how the United States corporate world would survive without the SOX Act. On the contrary, my viewpoint is retaining the SOX Act but have a smaller version of it. The SOX Act has affected the accounting profession in every publicly traded company in the US. All industries were significantly affected. Take the insurance industry for instance. The compliance requirements have increased both the direct and indirect costs. Notably, the accounting and auditing fees have increased in compliance with section 404 of the SOX Act. Additionally, indirect costs have also increased say in the cost of going public by private companies, decision-making and productivity, and so on. The SOX Act imposed strict scrutiny on public companies’ accounts and the public officials as well as their chief executives. As such, company managers have become risk-averse, and reviewing major decisions has been impacted negatively. Companies in the post-SOX era are reluctant to make investment deals. Similarly, a lot of time is wasted as accountants and employees scrutinize company reports and financial reports for compliance and loopholes that may be misconstrued as intentional fraud. This means that a lot of time is wasted, which could have been used in other economic activities. Moreover, private companies are constrained from going public due to the compliance costs involved.
Public companies are also pulling out their operations from the public domain, as they prefer the private sector, which does not have such stringent restrictions. As a result, the national economy has slumped.
The SOX Act requirement on having an independent director whose duty is to act as a watchdog to all company activities and raise alarm on fraudulent accounting practices is a hard-to-find person. Almost inexistent because it is unrealistic to expect a person to be involved in company operations and at the same time be undetached.
To add to the list is the fact that the requirements placed by the SOX Act on public companies to install IT systems in all financial reporting processes have increased operation costs among manual processing and extemporized measures to shift corporate governance demands.
The high cost of SOX implementation in publicly traded companies has increased the production and operational cost of public firms. This has posse a huge challenge to the companies as they compete with highly competitive Asian firms. Thus, American firms are losing out to Asian economies, which can produce low-cost products.
It seems to me that the SOX Act has not fully been able to rid the corporate world of the vice of accounting fraud; on the contrary, I feel it has perfected the art of covering one’s tracks and destroying evidence.
The SOX Act was implemented to prevent economic crimes such as those committed by Enron and WorldCom. It was targeted at public companies. However, the effects of the spill have also affected private firms in the sense that private firms intending to transact business with public companies have also to be SOX complement. The result has been that private companies with small capitals are sidelined from economic activities, which reduces economic activity.
President George Bush who is quoted as saying, “the most for reaching reform of American business practice since the time of Frankling Roosevelt” (Elizabeth, p2), signed the SOX Act into law. On the other hand, Bernie Ebbers, former Chief Executive Officer of the world com described the Sox Act and establishment of the corporate code of conduct as a “Colossal waste of time” (WorldCom Inc, p.19)
Compliance requirements in the Sox Act, which stipulate that companies that erroneously report their financial statements, should restate them after correcting adversely affects companies’ image. In such a case, investor confidence in the company is eroded as they may translate it to mean the company is untrustworthy and unreliable. It may cost millions of dollars for a company to bounce back from a situation.
While the idea behind the SOX Act is, noble it exposes company executives to unwarranted scrutiny. The psychology that follows this requirement is that the accounting profession as well as the corporation’s management blocks out legislation or renders the internal control system inefficient. Consequently, employee’s morale and productivity weaken which ids they’re reflected in the national economy.
With all the negative impacts that the SOX Act brings with it, I submit the proposal that the stringent requirements be reduced. This is not to mean that I am applauding the action of the Directors of companies implicated as fraudulent. By all means no. I am simply shedding light on the fact that there are negative impacts of the SOX Act. Perhaps a revision of the Act would patch loopholes in the law. Additionally, a reduction of the requirements would make the business environment friendlier for companies both private and public to operate.
Companies contribute a significant amount of money to the countries GDP and their well-being should be of importance to the government. The issue I would like to see addressed is the scrutiny of public company officials and the requirement for implementing its systems on financial reporting. Section 404 of the SOX Act regulation requirement that requires companies to implement internal control frameworks such as COSO is an expensive requirement. If the SOX Act intends to stop fraudulent accounting practices sin the corporate world, the stiffer penalties on officials or employees who take part in the embezzlement should be stiff so that economic crimes such as those by Enron and WorldCom never happen again
Bumiller, E. “Bush Signs Bill Aimed at Fraud in Corporations”, Tsshe New York Times, 2002, A1
WorldCom, Inc. Form 8-K Washington, D.C. Securities and Exchange