Effects ofSarbanes Oxley - Research Paper Example

In 2001, Enron Corporation, a USA energy company situated in Houston, hit its investors immensely when it filed for bankruptcy as a result of major corporate accounting forgeries carried out by its senior management and its auditor. The bankruptcy resulted in an estimated loss of almost $11 billion for its shareholders and the World saw a company with almost $63 billion market capitalization, file for bankruptcy (the largest dissolution in US history at that time) (Sterling, 2002). The major reason of the collapse of Enron Corporation was because of its fabricating and dubious accounting shams.

The senior management of Enron was actively involved in recording fake Revenues within its accounting records. The practice carried out at the company saw the senior management of the company record Revenues on the basis of the present value of net future cash flows. This resulted in phony accounting treatment and misleading reports which was needed to match profits and cash in order to satisfy the shareholders. The company saw its stock price of $90 in the year 2000 fall to a meager $1 per share by the end of November 2001 (Rapoport et al, 2009; Sterling, 2002).

This huge calamity saw the initiation of several new legislations including the Sarbanes Oxley Act, which was brought into existence in order improve the accuracy and the reliability of the financial statements and to provide a transparent picture to the shareholders (Rapoport et al, 2009). The legislation was passed by the US Congress in 2002 with a special focus of resuscitating investor confidence in corporations and others serving the capital markets. The title of the act clearly states its purpose.

According to the title, SOX is “an act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” (Golden et al, 2006) The act is named after US Senator Paul Sarbanes and US Representative Michael Oxley. The legislation was put forwards in order to provide a stringent role towards any unscrupulous act. The act carried severe punitive measures against the wrongdoers and it provided increased powers to both the top management and the auditors.

The act also enhanced its oversight role of the board of directors. The Act was introduced to look after several issues such as scrutinizing the Auditors, Directors’ and the top management’s roles. The act helped in reducing the conflict of interest between the shareholders, auditors, directors and the top management. Before its promulgation, auditors were self-regulated and were not answerable to any legislative or accounting body. Following the launch of the act, the Sarbanes Oxley legislation acted as a supervisory body which ensured that transparency was carried out while auditing the financial statements of a company.

The Sarbanes Oxley act helped in overcoming the transparency issue. A research carried out by Stefan Arping and Zacharias Sautner concluded that the act helped in improving transparency. The research was carried out over a few US firms that were comparable on the basis of their operations (Arping & Sautner, 2010). The Section 404 of the act has also been under the limelight for quite some time now. The Section 404 requires companies to produce an Internal Control Report reporting over the adequacy of the internal controls and the financial reporting