Consequences of the Sarbanes-Oxley Act 2002 - Essay Example

?The Costs, Benefits, and Unintended Consequences of the Sarbanes-Oxley Act 2002 Introduction Hellen Gebremichael’s article “The Costs, Benefits, andUnintended Consequences of the Sarbanes-Oxley Act 2002” which was published in August 2012 expounds on the positive and negative effects of the Sarbanes-Oxley Act. The study entailed a review of existing literature on Sarbanes-Oxley Act. Gebremichael did the study as part of a degree in Accounting and Finance, which she pursued in Coventry University. The study is important since it deals with an issue that has and continues affecting companies within the United States. The Sarbanes-Oxley Act, which was enacted by the congress on 30th July 2002, benefited the corporate sector but not without posing certain challenges to public companies that was required to implement it. The Sarbanes-Oxley Act aimed at restoring the investors’ confidence, which had been extinguished by the numerous frauds that had affected or even led to collapse of different companies. This paper is a critical review of Gebremichaels’s article and will give a summary of the article, critically evaluate the arguments in the article by analyzing the weaknesses, limitations, and problems of the article. Additionally, the paper will focus on the strengths and usefulness of the article particularly for study purposes. Summary Gebremichael’s (2012) article “The Costs, Benefits, and Unintended Consequences of the Sarbanes-Oxley Act 2002” claims that Sarbanes-Oxley (Sox) Act of 2002 is the most discussed legislation in the capital market. The research was carried out with the aim of evaluating how implementation of the SOX Act had affected the capital markets, economy, and entire corporate sector in the United States. The study focused on aspects of the SOX Act such as the benefits, consequences, and cost of its implementation. Gebremichael attributes the importance associated with the SOX Act to the consequences the act continues to have on United States public company as well as the entire economy. According to the article, the Act was enacted to curb accounting frauds, and regain the investors’ confidence by bringing transparency in the United States stock markets. The Act would do this by improving the way companies conduct their financial transactions through introducing corporate financial reporting in addition to modifying the way public companies are audited. The article finds section 404- Management Assessment of Internal Controls to be the most important and expensive provision to implement. This is because complete implementation of this section will have on companies. The article claims that the costs of implementing section 404 are too high while the benefits are minimal. This has already led to withdrawal of some foreign companies from the United States stock market. According to the article, holding executives, auditors, accountants, attorneys, as well as director responsible for financial regulation would help reduce cases of frauds. The article gives an account of Enron, one of the companies that collapsed due to auditing problems. The auditing problems led to bankruptcy and eventual collapse of the company. The account is important since frauds within Enron Company and Worldcom are among the companies that triggered the enactment of the SOX Act. Strengths, Problems, and Weaknesses of the Arguments in the Article The article puts forward a number of issues to demonstrate that the SOX Act has had both beneficial in addition to negative impacts on the United States public companies and the entire economy. Gebremichael argues that implementation of the SOX Act has enforced extra costs on companies. Most of the costs are attributable to practices such as audition as well as processing of financial reports, which are some of the requirements that public companies must meet. The major costs are in the time that managers must dedicate to overseeing that financial statements are processed accurately. This is a significant argument since directors and Chief Executive Officers (CEOs) have to divert considerable amount of time and energies to overseeing that the company transactions are done in an accountable manner. Additionally, the article argues that the costs of SOX Act implementation are higher for small companies as compared to large company. This is factual since the wide range of controls that must be implemented are of minimal benefit to small companies yet the cost of their installation is similar as in case of large companies. It is thus obvious that small companies will benefit less by implementing the SOX Act. An additional argument in the article is on the benefits that the implementation of the SOX Act will bring to the companies and the United States Corporate sector. Gebremichael makes use of existing literature to demonstrate these benefits. The main benefit is the enhanced shareholders trust. The article explains how fraud had reduced most people trust on the US capital markets and how the act altered this by reducing frauds. Another argument in the article is that there is no direct benefit attained by the investors and the companies from implementing the SOX Act. This is a mistaken observation since shareholders trust is a very crucial aspect in any company. The Act might affect the returns the shareholders get due to the costs incurred in the implementation process but it still has its benefits. The likelihood of frauds occurring is reduced and company CEO’s and CFOs will be more responsible. These are beneficial for the overall performance and success of the company. It was due to improper documentation and misreporting that led to the failure of detection of Enron and World Com. The fact that the CEOs and CFOs in Enron and World Com masterminded the erroneous accounting techniques is evidence enough that inventing a way of making them accountable is crucial. Additionally the fact that accurate financial statements are being prepared by most companies, as acknowledged in the article proves that the Act has benefited the companies themselves. This is because proper records are an important aspect that enables proper management. An extra argument in the article is that the implementation of the SOX Act has contributed to the deterioration of the United States stock market. However, the article does not provide adequate evidence on how the implementation of SOX Act has contributed to this. On the contrary, the article insinuates that the declined growth of the United States capital markets has resulted due to increased growth of other markets such as China and Eastern Europe. As much as equity markets affect the economy hence the capital markets of an economy, the article fails to prove how the SOX Act has affected the United States equity markets. A different argument in Gebremichael’s article is that the SOX Act has made the United States capital market less attractive to foreign investors. This argument is not clearly supported in the article. The author claims that the increased operational cost has threatened foreign companies from registering in the US stock market. However, the author agrees that the SOX Act has increased the confidence of investors on the United States market. It is thus unclear how the act would build the confidence of investors and at the same time discourage them from investing in the same market. As much as the SOX Act has led to de-legislation of some companies hence decrease IPO proceeds in the New York Stock Exchange (NYSE), the article does not display the importance of IPO in stock market. An additional argument that is not fully supported in the article is the claim that the SOX Act has contributed to the increased unemployment in the United States. The only prove used to support this argument is that the SOX Act implementation has discouraged investors. The above claim is in itself refutable since the author of the article acknowledges that the same Act has rebuilt the confidence of investors. Gebremichael further argues that the SOX act has negatively affected the competitiveness of US market. This claim is comprehensible since public companies play a major role in the overall performance of the economy. The fact that the Act has increased the performance cost of the companies means that the companies are not doing well. Additionally, the fact that the Act has made some companies to delist from the capital market attests to the role the Act has played in tampering with the competitiveness of the US markets. Usefulness of the Article Gebremichael’s article provides a wide range of other source that has discussed the issue of SOX Act. This is important for my study since I can easily locate the sources and use them in my study. The article discusses the SOX Act in a simplified way, which is crucial since the contents are easy to understand. Additionally, the article gives an insight on the importance of the SOX Act hence the need for further research on whether it has served its purpose and its importance. The article also points out the weak areas of the Act that requires to be reconsidered. Limitations of Gebremichael’s Study Gebremichael’s (2012) article has overemphasized on the costs of the implementation of SOX Act. The article pays minimal attention to the benefits of the Act. The article is somehow contradicting when discussing certain aspects of the SOX Act. A good example is the argument that the SOX Act has not benefited companies and investors. The fact that the article acknowledges that the Act has facilitated proper processing of financial statements which benefits companies indirectly means that the Act is beneficial to companies. Another limitation is the unsystematic way the ideas are presented in the article. The ideas in the article are not organized appropriately, which makes it a bit hard to analyze it. The study is entirely dependent on secondary sources. Other than collecting and analyzing data from existing sources such as books, websites, journals and other document, the author does not conduct any further studies. This is disadvantageous since the information could be erroneous in some ways, which is hard to detect. By this, I mean that it could be hard to determine the credibility hence reliability of some information. In case of primary information, the researcher is more capable of providing reliable information since the data is obtained directly from the source. Conclusion Gebremichael article on the benefits, costs, and consequences of the SOX Act is based on literature review of existing information on this issue. The article argues that the SOX act has had impacts that are more negative on US public companies as compared to the benefits. According to Gebremichael, most companies have not reaped any direct benefits even after incurring the high cost of implementing the Act. Some of the argument made to support this claim is that the Act has led to de-legislation of some foreign companies from the US stock market. Additionally, the Act has led to increased operational cost due to the implementation cost. However, the article is biased in that it fails to acknowledge benefits of the Act. The fact that the Act has helped reduce frauds in US means that it has somewhat played the role of restoring the investors’ confidence on the US market. Additionally, some of the ideas in the article are contradicting. A good example is the claim that the implementation of the SOX Act has helped reduce fraud hence improving shareholders confidence in public companies. This contradicts another claim that the act has discouraged investors. Nevertheless, the claims could be true but the author fails to provide enough evidence to prove the claims. Nonetheless, the article is crucial for studies on the Sox Act due to the wide range of source it has used, which one can refer to ascertain the truthfulness of the arguments. In conclusion, the article is somehow helpful but the fact that the author entirely relies on secondary information make it less dependable. Read More