The Sarbanes-Oxley Act and Its Implications - Essay Example

Sox Project Everest Brenda Jones Dr. John Halstead Outline 0 Introduction 2.0. Financial Regulations 2 SOX and ItsImplications 3.0. Financial Theories 3.1. Diversification and its implications 4.0. Use of SOX and Diversification by HSBC Finance Corporation to gain competitive advantage 4.1. SOX 4.2 Diversification 5.0. Conclusion 6.0. References Abstract The objective of this study is to analyse the importance of the Sarbanes-Oxley Act (SOX) and diversification theory. As also discussed in the essay, the SOX Act provides guidelines and standards with the aim of ascertaining that organizations are able to conduct operations sustainably. Similarly, diversification theory aids businesses in minimizing financial risks. The SOX Act and diversification theory also aids HSBC Finance Corporation in performing its business operations in a transparent manner. Additionally, the company is also facilitated with the opportunity of building trust as well as confidence amid customers. Correspondingly, the study reveals that the company has been able to conduct operations in a reliable as well as sustainable manner. 1.0. Introduction Economy and finance are interrelated subjects in the present day context. Thus, financial institutions are required to protect themselves from crisis and recession conditions for better business sustainability. It is with this notion that the United States Federal Law has been implemented at different levels to protect financial institutions from forecasted crises. Additionally, these laws have been enacted with the intention of ascertaining that financial institutions are administered well proficiently to minimize malpractices conducted by corporate entities at often instances (Ryu et al., 2006). A prominent example of such a law is the US implemented Sarbanes-Oxley Act (SOX), which was enacted in the year 2002 with the intention of restoring confidence among market segments and corporate sectors worldwide following the liquidation of Enron Corporation. This Act was intended to assist in resolving issues existing within the auditing or accounting practices conducted by professionals as per the company legislations. Formally, in the Senate, the SOX Act is known as “Public Company Accounting Reform and Investor Protection Act” and in the House, it is identified as “Corporate and Auditing Accountability and Responsibility Act” (OSHA, 2011). In this essay, the effectiveness of the SOX Act will be assessed with consideration to HSBC Finance Corporation, which is a subsidiary of Hong Kong Shanghai Banking Corporation (HSBC) Group, headquartered in the UK. It is a financial service providing company. The company is also identified to provide different financial services that include auto loans, real estate loans, insurance products and Visa credit card as well as MasterCard loans among others. In this context, the company operating in the US is required to conduct operations in adherence with certain principles and policies, so that business operations are performed ethically and sustainably (HSBC Bank USA, 2014). Correspondingly, the essay focuses on examining the SOX Act along with the application of the diversification theory with a view that financial downfalls are affecting the US adversely, which in turn influences the operations of HSBC Finance Corporation largely. The essay also discusses the procedure based on which, HSBC Finance Corporation, with the help of the SOX Act and diversification theory, has been able to conduct operations gaining better competitive advantages in the market segments. 2.0. Financial Regulations In every organization, rules and regulations play an important role. Every corporation is bound to follow certain rules and regulations, wherein the list of corporation includes financial institutions, such as the HSBC Financial Corporation. In general, financial regulations provide guidelines, requirements as well as restrictions for financial organizations. In this regard, the SOX Act is one of the guiding principles enacted in the US with the aim of guiding financial institutions to conduct business operations sustainably (Brunnermeier et al., 2009).     2.1. SOX and Its Implications In the year 2000, a massive fall was identified in the US, principally because of the downfall in the housing market. It was in response of this downfall in the housing market that the United States Federal Law formulated the SOX Act. In the year 2002, the SOX Act was enacted by the United States Federal Law. In the Senate, the SOX Act is identified as ‘Public Company Accounting Reform and Investor Protection Act’ while in the House, the Act is referred as ‘Corporate and Auditing Accountability and Responsibility Act’. The Act has been named ‘Sarbanes Oxley’ after the names of Paul Sarbanes and Michael G. Oxley. Paul Sarbanes is an US Senator and Michael G. Oxley is an US Representative. The SOX Act prescribes guiding principles, information and restrictions to all types of financial organizations of the US. The principles of the Act are adopted by organizations as standards based on which, auditing as well as various routine financial operations are conducted. To be precise, the SOX Act provides guidelines based on which financial statements of different organization are strategized, aligned and implemented with a substantial rise in the defined responsibilities of directors and auditors to ensure that financial reports are prepared appropriately. The SOX Act prescribes that audit reports quality should be as per the legal codes and guidelines of accounting principles. Prior to the enactment of the Act, different organizations, including Arthur Andersen, Enron, Xerox and WorldCom, were identified to have performed auditing and financial reporting frauds, which adversely affected the American Stock Industries as well as employees and investors, further deteriorating the economic conditions of the demography (Soxlaw, 2006). Enron and WorldCom are identified to face financial difficulties owing to the fact that the financial statements prepared by the auditors were not consolidated on the basis of accounting principles (Lyke & Jickling, 2002). After the implementation of the SOX Act in the US financial sector, the quality of auditing and financial reporting has enhanced at an immense rate. The enactment of the Act has also assisted in developing the economic environment of the US, owing to the fact that the financial and other corporate institutions are required to comply with the regulation for ensuring that financial statements depict appropriate information about the business performances. With the advantage of such a systematic approach, organizations complying with the SOX Act have been able to ensure that financial statements are formulated as well as presented in a transparent manner with adequate accuracy and responsibility to avoid any chance of misinterpretation of the presented data. To be illustrated in this context, according to the Act, senior management of an organization is entitled with the responsibility of certifying the truth of financial statements. Management and auditors establish control over financial reports, so that financial information is depicted in fair value. The SOX Act also attempts to remove auditors’ conflicts regarding interest, boardroom failure and misrepresentation of financial information. Accordingly, the SOX Act prescribes certain rules to the accounting firms failing to manage their accountants as well as to create specific duties and responsibilities for auditing firms and partners, emphasising adherence to transparency requirements. Based on these principles, the Act has quoted certain laws with the intention of providing better independence to auditors. In accordance with the law, the partner auditing firms, those who are assigned for auditing their client’s accounts, are to be rotated on a five-year basis, which is expected to preserve the desired level of auditor independency and maintaining transparency in the financial reporting practices. Moreover, the law also restricts auditors from the practice of non-audit facilities and other consulting services with the objective of developing better independence of the accountants with an intent to assure balance between transparency and accuracy of data (SOX-Online, 2012; Ryu et al., 2006; Soxlaw, 2006). However, the SOX Act has been ineffective in certain areas that are required to be modified with the aim of ensuring that the accounting principles followed by firms depict fair and accurate values through financial statements. The accounting principles are identified to be overstated that are recognised to increase complexities. Additionally, in the SOX Act, there should be certain criminal penalties for improving financial responsibilities of accountants and minimising the conduct of illegal act (Niskanen, 2008). The SOX Act has been identified to be inaccurate and unnecessary, as the act has raised complexities in corporate sector for interest’ conflict. The SOX Act is also identified to be ineffective in mitigating issues relating to auditing, accounting, corporate governance and taxation, which may be accountable for bankruptcy. In this regard, the SOX Act should be repealed (Dvorak, 2007). 3.0. Financial Theories 3.1. Diversification and its implications Diversification theory implies reducing risks, which is non-systemic in nature and can be observed to have a strong influence on the implemented legislatives as per the SOX Act. In general, diversification is asserted as a technique used for reducing investment risks and weighted average risks of constituent assets. In finance, risk factor is always associated with funds. Investors are thus required to make effective investment decisions as they always have a negative impact about investing in stocks or share. Global economic conditions are also constantly going through frequent ups and downs making mid-term or long-term forecasts a major challenge for investors. These difficulties create a psychological pressure on investors as well as top-level managers to take right decisions in order to maintain optimum balance between risks and returns. Thus, investors and top-level managers are solely dependent on the authenticity of the financial disclosures presented by the company. The SOX Act herewith focus on the notion that maintaining accuracy, transparency and systematic flow of all-inclusive information is necessary to ensure proper investment decisions. As the implications of the diversification theory indicate, in the current scenario, investing in funds is common wherein the future of global financial growth is laid in investment on funds and stocks largely. The main concept of diversification theory thus concentrates on reducing risks from investments, which is applied in the SOX Act with an expansion to its intent aimed at bringing improvements in the global economic conditions. This particular notion can be better explained with reference to the current phenomenon observable in the stock market, wherein investors face different types of market risks. Market risks are commonly identified to increase and influence inflation rates, exchange rates and interest rates. Additionally, market risks are also identified to affect economic as well as political conditions of an economy adversely. Unsystematic risk is another common risk, which could be reduced with the assistance of diversification theory as applied in the SOX Act. Contextually, diversification theory suggests investors not to invest their money in one type of financial instruments. Investing in a particular instrument would increase the risk factor. However, investment in multiple financial instruments would decrease the risk of loss, while diversification would facilitate in managing investments effectively. In this context, financial information and risk should be ascertained with the assistance of different financial concepts that include CAPM, stock valuation and time value of money. The financial concepts aid financial institutions that include HSBC Finance Corporation in ascertaining that financial information calculated are accurate as well as transparent for better adherence to SOX Act. In addition, financial institutions using different types of interest rates that include periodic rate, effective annual rate and nominal rate are able to interpret financial information successfully. The financial concepts are used in order to ensure that financial information is presented with accuracy (Juvenal & Monteiro, 2013; Clawson, 2011; McCracken, 2009). 4.0. SOX Diversification by HSBC Finance Corporation to gain competitive advantage 4.1. SOX HSBC is a financial service providing company operating in the global context. The head office of the company is located in the UK. HSBC Finance Corporation is a subsidiary of HSBC operating in the US. It is mainly concentrated on providing loans and debit-credit cards to the commercial as well as retail customers in the form of auto finance loans, private credit loans and non-credit loans to the customers. Notably, HSBC Finance Corporation also performs business operations in accordance with the rules and regulations of the United States Securities and Exchanges. The SOX Act is herewith considered one of the acts, which come under the US Securities and Exchanges Regulations. In the year 2002, the SOX Act enacted with the aim of enhancing financial standards. The main objective of the Act is to minimize fraudulent practices in account reporting. In this regard, HSBC Finance Corporation deals with different sorts of capitals and loan services. Customer reliabilities and retentions are additionally considered as the main priority for HSBC (AHSBC Bank, 2014; American Institute of CPAs, 2014). Contextually, the operations of HSBC Finance Corporation are required to be maintained on the basis of certain accounting policies. In this regard, HSBC adopted the SOX principles, which in turn assisted the company in building faith amid customers regarding policies and funds. To be mentioned in this regards, the key provisions of the SOX Act are to create a better transparent financial environment, which in turn would aid in building the economic conditions of an economy. It is in this context that the SOX Act facilitates the management team of HSBC to conduct their individual operations in a more independent manner regarding financial matters. Additionally, the Act also eases the auditors and other financial analyzers in having better access and control over the preparation and issuance of financial reports. However, as the Act, the auditors and financial team in HSBC will require formulating and issuing financial reports on the basis of the standards as well as regulations laid as per the SOX Act. Hence, the company complying with the SOX Act is facilitated with the opportunity of ensuring that the financial operations are conducted in a secure and error free way to minimize chances of fraudulency in the financial reporting process. Implementation of the SOX Act has also helped the company to gain an increased number of corporate partners as well as financial advisors, as fraud free financial reports always bestow positivity for any corporation (American Institute of CPAs, 2014; Ryu et al., 2006). HSBC Finance Corporation, with the implementation of the SOX Act has been able to prepare fraud free financial reports, acquire new corporate partners and customers for disclosure of true financial information. As per the SOX Act, there are 11 titles, which may help to mitigate the challenges faced by the company. HSBC finance Corporation is a vintage corporation in the financial market. As a vintage corporation, HSBC had millions of customers as well as corporate partners. The main vision of the company is to develop sustainability in the market segments and to retain customers and corporate partners more efficiently. The main objective of the SOX Act is to make the financial transactions transparent for the investors and to make the capital market more efficient for developing better public confidence relating to investment decisions. The SOX Act is applicable in the US. In this context, HSBC finance Corporation conducting operations on the basis of the SOX standards and regulations is able to maintain better transparency and accuracy. HSBC Finance Corporation implementing the SOX Act is able to build reliability as well as confidence amid investors in relation to capital and capital returns. Financial crisis has affected the global economy, which raised insecurity amid investors about ROI but the SOX Act aided in stabilizing the economic condition largely. Investors and corporations invest with the intention of obtaining better returns. In this respect, it can be affirmed that the SOX Act contributed in meeting the desire of investors effectively. Subsequently, HSBC Finance Corporation with the assistance of the SOX Act is able to support customers and corporate partners successfully by publishing accurate and transparent financial reports. In this respect, the company is able to conduct business operations with enhanced competitive advantage (American Institute of CPAs, 2014; HSBC Global Asset Management (HK) Limited, 2014; Ryu et al., 2006). 4.2. Diversification Diversification theory is another mode of securing financial risk. Diversification is a procedure of investing multiple financial instruments in order to reduce risk and improve the level of return on investment. In this context, HSBC Finance Corporation is identified to adopt diversification theory with the aim of managing its portfolio in different work level. HSBC Finance Corporation mainly deals with loans and funds. Correspondingly, the company diversifying its service portfolio signifies that the company besides providing loans also allows customers and corporate partners to invest in multiple financial instruments (HSBC Bank, 2014; Juvenal & Monteiro, 2013; Clawson, 2011). HSBC Finance Corporation is a financial service providing company. The company implementing diversification theory is facilitated with the opportunity of improving the level of capitals. In this regard, the company is able to provide customers with loans and credit instrument options based on which the customers are able to diversify their investment decisions. Correspondingly, the customers are eased with the opportunity of investing in different financial instruments are able to manage the investments effectively. Moreover, the company with the assistance of diversification theory is able to build confidence and reliability amid customers as well as investors. In this context, diversification facilitates the company in attracting as well as retaining new along with old customers successfully (2HSBC Bank, 2014; Juvenal & Monteiro, 2013; Clawson, 2011). HSBC Finance Corporation has been identified to implement diversification theory on the basis of its diversified portfolio in order to maintain investment value. The company provides different investment options that include bonds, equities and other financial alternatives. The diversified portfolio is implemented for managing asset allocation in a tactical and strategic manner. In this respect, the company with the assistance of diversification theory is able to provide effective investment solution, investment types and investment knowledge. Respectively, diversification has assisted the company in managing financial risks associated with investments in loans and bonds services among others by increasing flexibility and reducing volatility. Diversification aids in building confidence and reliability amid customers, which in turn assist in attracting customers (BHSBC Bank, 2014; Juvenal & Monteiro, 2013; Clawson, 2011). 5.0. Conclusion From the above discussion, it can be comprehended that organizations are required to conduct operations in a competitive manner for better business sustainability in the present recessed global economy. In this regard, organizations should adopt certain standards and procedures based on which businesses are required to be conducted for better sustainability. HSBC Finance Corporation is a subsidiary of HSBC operating in the US. The company provides different financial services that include loans and credit facilities. Subsequently, the company adopting the SOX Act and diversification theory is able to conduct business operations in an effective manner. Accordingly, the SOX Act prescribes certain rules to govern accounting firms failing to manage their accountants as well as to create specific duties and responsibilities for auditing firms and partners. Based on these principles, the Act has enacted certain laws with the intention of providing better independence to auditors. On the other hand, diversification theory assists in diversifying investment opportunities with multiple financial instruments. In this context, HSBC Finance Corporation with the assistance of the SOX Act and diversification theory is able to conduct operations in a transparent manner. The company is also able to build trust as well as confidence amid customers, which in turn aids in attracting as well as retaining customers. The SOX Act aids the company to secure the capital and diversification theory assists in making financial instruments more reliable for the company to maintain investments of customers. Respectively, the company with the assistance of the SOX Act and diversification theory is facilitated with the opportunity of performing business operations with better sustainability and competitiveness. References American Institute of CPAs. (2014). Section 404(b) of Sarbanes-Oxley Act of 2002. Retrieved from: http://www.aicpa.org/advocacy/issues/pages/section404bofsox.aspx Brunnermeier, M., Crocket, A., Goodhart, C., Persaud, A. D., & Shin, H. (2009). The fundamental principles of financial regulation. Geneva: International Center for Monetary and Banking Studies. Clawson, T. (2011). The benefits of diversification. Retrieved from: http://www.santanderbreakthrough.co.uk/advice/strategy/benefits-diversification Dvorak, J. C. (2007). Repeal Sarbanes-Oxley. Retrieved from http://www.marketwatch.com/story/its-time-to-repeal-sarbanes-oxley HSBC Bank USA. (2014). Investor relations. Retrieved from http://www.us.hsbc.com/1/2/home/about/investor-relations/hfc-info HSBC Bank. (2014 A). About HSBC. Retrieved from: http://www.us.hsbc.com/1/2/home/about/corporate/leadership/hsbc-finance HSBC Bank. (2014 B). Gain confidence in a world of uncertainty. Retrieved from: http://www.us.hsbc.com/1/2/home/business/international-banking/foreign-exchange-risk HSBC Global Asset Management (HK) Limited. (2014). HSBC Portfolios - World selection series. Retrieved from http://www.assetmanagement.hsbc.com/hk/attachments/pdf/world_selection_eng.pdf Juvenal, L., & Monteiro, P. S. (2013). Export market diversification and productivity improvements: Theory and evidence from Argentinean firms. Retrieved from http://research.stlouisfed.org/wp/2013/2013-015.pdf Lyke, B., & Jickling, M. (2002). WorldCom: The accounting scandal. CRS report for congress, 1-6. McCracken, M. (2009). Teach me finance. Retrieved from http://www.teachmefinance.com/ Niskanen, W. A. (2008). Repeal Sarbanes-Oxley--lock, stock and barrel. Retrieved from http://www.forbes.com/2008/12/16/sarbanes-oxley-reform-oped-cx_wn_1217niskanen.html OSHA. (2011). Filing whistleblower complaints under the Sarbanes-Oxley Act. Retrieved from http://www.osha.gov/Publications/osha-factsheet-sox-act.pdf Soxlaw. (2006). The Sarbanes-Oxley’s Act 2002.Retrived from: http://www.soxlaw.com/index.htm SOX-Online. (2012). Sarbanes-Oxley essential information. Retrieved from: http://www.sox-online.com/basics.html Ryu, T. G., Uliss, B., & Roh, C. (2006). The effect of the Sarbanes-Oxley Act on auditors’ audit performance. 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