Impact of the SarbanesOxley Act of 2002 in Corporate Governance - Research Paper Example

The Impact of the Sarbanes–Oxley Act of 2002) in Corporate Governance and How It May Benefit the UAE name: Date due: Table of Contents The Impact of the Sarbanes–Oxley Act of 2002) in Corporate Governance and How It May Benefit the UAE 1 Table of Contents 2 Sarbanes–Oxley Act of 2002 3 II. Encouraged the Adoption of Corporate Codes of Ethics 5 III. Produced the PCAOB 6 IV. Explained and Convoluted the Role of In-House Counsel 7 V. Established Cultural Roots of Shareholder Activism 8 VI. Increased the Running Costs of Public Companies 8 VII. Empowered the SEC 10 VIII. Influenced Operation of the Private Companies 11 Why the UAE Should Adopt the SOX 11 Expansions by Audit Committees 11 Lessened Effectiveness of the Audit Market 12 Increment in Accounting Costs 13 Expanded Records-Management Requirements 13 Compensation Increases 14 Increment in Audit Fees 14 Effect on Private Companies 15 Conclusion 15 Works Cited 16 Sarbanes–Oxley Act of 2002 The Sarbanes-Oxley Act (2002) was enacted following a series of corporate and accounting failures. Sandals by different companies, which included Enron, Tyco International, WorldCom, Peregrine Systems, and Adelphia, between 2000 and 2002 resulted in poor faith in the U.S. securities markets, thereby costing investors billions. The goal of the act was the prevention and deterring of future accounting fraud, while protecting the shareholders and increasing the confidence of the public in company financial reporting and the U.S. capital markets. Presented by Statesman Paul Sarbanes and Michael G. Oxley, thus the act’s nomenclature, and enacted on July 30, the act aimed to regulate and control the corporate and accounting sectors, particularly in the public company boards of management, and the management and public accounting companies (Shakespeare 333). The act goes by several names, considering its purpose. The act was referred to as the Corporate and Auditing Accountability and Responsibility Act when in the house, whereas in the Senate is as per the Public Company Accounting Reform and Investor Protection Act. The SOX (also Sabox) was proposed as an act that would protect investors by ensuring improvements in the corporate disclosures precision and trustworthiness for among other purposes pursuing the securities market and laws. The outcome of the act is sections that dictate the responsibilities expected of a public corporation board of directors, the criminal consequences to various misconduct, and creation of regulations by the Securities Exchange Commission (SEC) on the compliance of public corporations to the act’s laws. The laws of the act are encased in eleven titles under the elements which include the Corporate Responsibility, Public Company Accounting Oversight Board (PCAOB), Corporate and Criminal Fraud Accountability, Auditor Independence, White Collar Crime Penalty Enhancement, Enhanced Financial Disclosures, Studies and Reports, Analyst Conflicts of Interest, Commission Resources and Authority, Corporate Tax Returns, and Corporate Fraud Accountability. The section covers the legal provisions which include disclosure controls (302), Improper influence on conduct of audits (303), disclosures in periodic reports also termed as Off-balance sheet items (401), Smaller public companies (404), criminal penalties for influencing US Agency investigation/proper administration (802), criminal Penalties for CEO/CFO financial statement certification (906), and criminal penalties for retaliation against whistle-blowers (1107). The coverage of the act led to the following outcomes in both the public and private sector, thereby influencing corporate governance. The changes that resulted from the act followed the titles, elements and provisions captured in the law. The changes in corporate governance include, but not limited to: I. Reformed and Re-Empowered the Corporate Board of Directors The change that was most prominent with the SOX act is the view that the board of directors served the management, whereas it was supposed to be that the management served the board, as such empowering the board. The corporate structure in the U.S. was not being adhered to by the corporate entities, and a reform was necessary for the board to act as an oversight authority. The radical shift called for the independence of the board directors, such that they would be impartial in assessing management while being liable to the board’s failure to engage in appropriate supervision (Farrell 67). The boards thus became proactive and comprised of more diverse members, which resulted in companies getting stronger, and as technical expertise was incorporated in the new board formations. The result of the act was the board having more powers and responsibilities in management of the company. The independent auditors to companies work with the board in the evaluation of the company reports, though each with different responsibilities. The auditors are expected to report on misconducts to the SEC, whereas the board of directors is expected to follow-up on the dispute (Kohn, Kohn and Colapinto 104). Reporting the company to the SEC should however be done only if the board of directors fails to respond to the reported misconduct. The two entities work towards supervising the performance and associated reports of a company, with respect to the interest of the investors. This entity is useful to the UAE’s adoption of the SOX, as it is a measure that ensures the markets are provided with a clear report on the progress made by a company. II. Encouraged the Adoption of Corporate Codes of Ethics Companies are expected to incorporate a code of ethics in its operations. The SOX, under the disclosure provision, expects the senior executives and financial officers to follow the company’s code of ethics, and in its absence explain why there is none. The New York Stocks Exchange and NASDAQ also demanded that companies have as well as disclose a code of conduct. SOX did not demand the existence of a code but implied that the SEC expected each company to present its code of conduct (Kuschnik 83). The government had been encouraging the adoption of a code of conduct/ethics by companies, though there was no law or provision that demanded that companies adapt the suggestion. Compliance to the SOX and SEC demands facilitated the incorporation of companies in the securities, which covered the public companies effectively. There were incentives that pushed companies to having a code of ethics and conduct such as reduced criminal sanctions by the federal government. These benefits would only be realized by companies that complied with the proposed conduct. The SOX acted as a regulatory framework by which the same agenda was pushed. Incorporating a code of ethics in the company is necessary, but the efficiency associated with the approach is minimal where there is no compliance (Beasley and Hermanson 16). Cases showed that even with the code of ethics, the investors were still at risk from senior executives’ misconduct, such as Enron. In the case of UAE adopting the SOX act, it must emphasize on the need for compliance to the code of ethics and conduct. III. Produced the PCAOB The SOX was responsible for the development of essential structures in the management of accounting practises. The act resulted in the development of the independent Public Company Accounting Oversight Board (PCAOB). The PAOB was created in 2002 with the intention of monitoring the conduct and professionalism of the independent auditors to the [public companies, which replaced a self-regulatory system thereby evolution into a truly independent approach. The approach meant that the auditing companies are subjected to scrutiny via audits by the board, where the internal controls could be subjected to analysis. The pinnacle of the board is the ability to call up any of the auditors in a company and demanding records of the individuals past five assignments, on demand without any need for notices. The accounting firms must be registered by the PCAOB and by doing this the firms agree to annual or tertiary inspections depending on the size. Some of the responsibilities that were taken up by the board included the promotion of transparency in audits, updating the reporting format, expansion of the foreign inspections, and ensuring the continued independence of the auditors (Kuschnik 83). In an attempt to ensure, the transparency in the firms, mandatory firm rotation, and limitation of terms between the public companies and the respective audit firms are necessary. Expansion of companies poses a challenge to anyone in the public domain, and further improvements to the boards mandate are necessary, such as incorporating the authority to enhance the field, as well as establishing better broker-dealer audits. IV. Explained and Convoluted the Role of In-House Counsel SOX had an effect on how SEC business is conducted business, through several measures as indicated above, but it also provided directions on the involvement of lawyers. The act provided the SEC with a regulation that in-house and external lawyers working under or in affiliation to the SEC report any presence of material violation to the CEO or CLO of the company under scrutiny (Agami 6). Following the report by the CLO is expected to take sensible steps in response to the reported concern. If the attorney involved in the audit feels unsatisfied by the steps taken by the CLO, the responsible thing to do for the lawyer is report the probable transgression to the audit or an alternative committee. The proposition is useful, although the reported misconduct is confidential, and no disciplinary action can be taken towards the involved persons. In this retrospect, the rule cannot be established as effective or not as there are no filed reports on possible misconduct. The rule is an attempt to introduce diligence in public company operations, though there is a challenge to the structuring. In-house lawyers work on a balance since their employment is determined by the image the company’s executives and CEO have of the services provided. As a result, the in-house companies concentrate on the interests of the company, considering the objectives of the overseeing authority. The in-house counsel has its functions increased from the SOX reforms. The company’s counsel is expected to ensure the adherence to the SOX recommendations, and reforms, while substantiating the independence of the directors while working with the auditors, as well as the protection of the whistle-blowers and the internal systems of reporting misconduct (Kimmel, Weygandt and Kieso 67). The responsibilities of the in-house counsel have complicated the workings of the position, and ensuring the adherence to the SOX is not a matter that can be easily delegated to outside counsel. V. Established Cultural Roots of Shareholder Activism Shareholder activism is expanding, with Dodd-Frank pushing forward shareholder intermediary get to and "say on pay" remuneration counselling standards. Such patterns have their roots in SOX and the Enron-period corporate outrages, which pushed issues like official recompense and board freedom into the spotlight. This developing discussion about more noteworthy shareholder majority rule government is without a doubt traceable once again to the sort of ethos that SOX empowered. SOX banned the official advantage of corporate advances, the alleged Bernie Ebbers guideline, named for the previous Worldcom CEO. It additionally permitted the SEC to stop official rewards and other uncommon instalments. Such governs prompted a more extensive concentrate on when official pay and advantages are unreasonable, how reliably pay is situated, and what arrangements oversee choices on pay and brilliant parachutes (Kimmel, Weygandt and Kieso 67). Those discussions are consistently proceeded through Dodd-Frank. Inquiries, for example, whether danger based pay or pay-for-execution is fitting, whether shareholders are permitted to select individuals to the board impact the sorts of shareholder administration standards that SOX in a roundabout way into, and on which Dodd-Frank is keeping on advancing on. VI. Increased the Running Costs of Public Companies There is a SOX consistence, their fourth year of SOX consistence, most associations use in the scope of $100,000 to $1 million yearly on agreeability related exercises, as indicated by a 2011 overview by Protiviti, a review and danger consultancy (Carney 8). That does exclude the time and centre prepare to leave parts and officials must use on consistence matters. Studies found that most organizations in their first year of SOX consistence say the expenses exceed profits. Then again, after the first year, they reliably take the inverse perspective, recognizing advantages, for example, a finer understanding of control plan and expanded adequacy and effectiveness of operations. Regardless, the expenses and requests that SOX put on SEC-enrolled organizations are generally reprimanded for driving organizations from open posting in the U.S. particularly remote and littler organizations. The 2000s experienced a decrease in U.S. first sale of stock (IPO) movement while IPOs climbed in outside nations. The Capital Markets Regulation Committee reported that private company exchanges made up 25 percent of all open takeovers in 2005—that is more than double the pre-SOX level (Chan 7). The pattern was to a great extent faulted for SOX. A study by Robert Bartlett, collaborator law teacher at School of Law in UC Berkeley, found that huge organizations going private post-SOX have not dodged types of financing that still oblige SEC reporting (Chan 7). In the event that they were set private to stay away from SOX-forced consistence troubles there ought to have been a lessening of such financing sources. Be that as it may, the inverse was valid for littler organizations (Blaskovich and Mintchik 32). Bartlett, who prompts Silicon Valley new companies and investors, the expense of SOX consistence has "altogether" expanded the time period in which an organization stays private (Chan 7). It requires significant investment to set up those methods, and it obliges a more refined back office too. That is not an awful thing from a corporate administration viewpoint, and Blonder says, indicating the Internet bubble. Organizations that open up to the world today are frequently in a superior position to do so on the grounds that they have needed to consider the expanded obligations of SOX. Doubtlessly the costliest procurement of SOX is Section 404, which forces the necessity that organizations must contract outsider free examiners to survey their interior controls. The prerequisite produced results in 2004 and outer review charges expanded 271 percent somewhere around 2001 and 2006, as indicated by a 2007 Foley & Lardner study. Eaddy says the expenses of 404 consistence were terribly, horribly oppressive. In 2007, the SEC passed an arrangement of Section 404 changes to absolved littler organizations from the free review necessity, and the SEC says more than 60 percent of the organizations documenting with it are presently excluded. Be that as it may the 404 necessities are not all unscrupulous (Grumet 5). VII. Empowered the SEC In addition to different measures, SOX augmented the statute of impediments for the SEC to seek after activities and expanded the punishments available to them. As per Currier, SOX changed the offset of force in the middle of organizations and prosecutors, placing prosecutors in the drivers seat. SOX likewise made clear what divulgences were needed of open organizations, so now it is less demanding for the organization to seek after requirement. The centre values that you need to take after when making divulgences are much clearer now than they were, about10 years prior. Thomsen says the SEC has gotten a lot of utilization from the capacity under SOX to convey ejected cash to wronged speculators through Fair Funds (Hill, McEnroe and Stevens 8). As indicated by the Government Accountability Office, $9.5 billion in Fair Funds were requested from 2002 through February 2010, most before May 2007 (Hill, McEnroe and Stevens 8). The vomited stores originate from punishments from violators, either organizations or people. The SEC has truly been forceful recently in upholding the vomiting procurement (Hill, McEnroe and Stevens 8). The SEC made requests to CEOs and CFOs to reject some forms of payment. It is assumed a part in a percentage of the Dodd-Frank procurements, for example, one commanding the usage of CEO/CFO spewing methodology. VIII. Influenced Operation of the Private Companies Privately owned businesses that are not liable to SOX changes have regardless received some of its procurements as best practices, for example, guaranteeing the autonomy of executives and receiving review and review advisory group techniques. While Sarbanes-Oxley has changed open organizations, it has changed privately owned businesses significantly more (Tackett 6). They do it on a deliberate premise in light of the fact that its great business and it gives straightforwardness, whether it is to banks, private value firms or other financing sources. That is an alternate element bringing SOXs belongings to privately owned businesses: Increasingly, different wellsprings of financing have a desire of strong corporate administration and straightforwardness. Furthermore, some privately owned businesses are verifying the preparedness for the requests of future open posting. Contingent upon their passageway methods, bigger open organizations, have received different levels of SOX agreeability. Why the UAE Should Adopt the SOX Expansions by Audit Committees In 1999, the NYSE and the NASD made the Blue Ribbon Committee advance the efficiency of Company Assessment Committees. The advisory group secured suggestions that review board sanctions oblige gatherings no less than four times each year. Since SOX, as expected, review boards of trustees are gathering all the more often. The yearly Spencer Stuart Board Index investigation of corporate administration in S&P 500 organizations found that review panels met, by and large, five times each year in 2002 (Tackett 6). In 2003, the recurrence of gatherings expanded to seven. An interchange study of administration practices in 200 companies by Pearl Meyer & Partners reported a normal recurrence of nine gatherings for review advisory groups in 2005 (Swartz 4). Lessened Effectiveness of the Audit Market The GAO (General Accounting Office), which turned into the Government Accountability Office in 2004 in July 2003, distributed a report titled "Open Accounting Firms: Mandated Study on Consolidation and Competition." The SOX-commanded report did not find weakened rivalry in the review market for open organizations, nor did it discover the conditions good for any second-level firms joining the Big Four. The GAO expressed: Lack of staff, industry and specialized skill, capital arrangement, worldwide scope, and notoriety" embody a percentage of the business sector compels that make it farfetched that any organizations will have the capacity to join the Big Four. Size divergence between the top-level and second-level firms might simply be so substantial there is no option succeeded. In the event that all the incomes of the second-level firms are included, they miss the mark regarding the income of KPMG, the littlest of the top-level firms. One requirement to organizations transforming from the first-level review firms to the second level is topographical scattering of operations. The Big Four, with their overall scope and different properties noted above by the GAO, remain the best review firm contender for organizations with noteworthy size and worldwide operations. The review market has changed since SOX, and the starting concerns with respect to withdrawal and diminished intensity now appear to be less troubling. The expanded review requests attributable to SOX have been fulfilled by a few movements from first- to second-level firms. Then again, the SEC stays careful that a few enterprises can be suitably served just by the Big Four, and the loss of an alternate firm from the first level could revive concerns of business compression and diminished aggressiveness. Increment in Accounting Costs A study by Financial Executives International reported that little organizations envision going through $824,000 to follow SOX and that the normal expense for all organizations is $4.3 million. One segment of agreeability expenses is identified with corporate administration. Pearl Meyer & Partners 2005 studied the compensation offered to directors and found that the average compensation rose by about 10% that year, to $183,204. In 2004, a similar increment of 13% was realized. These specialists kept up that three board boards review, remuneration, and administration/designating are the councils that are for the most part most affected by issues identified with administrative changes, shareholder activism, and people in investigation of monetary controls, official payment, and board execution. One way that organizations are adjusting board pay to the new administration environment is by separating council seat pay by the exertion requested of the panel. Interestingly, the pay for board parts on these panels was accounted for to be level or down. The recompense report notes that companies depend less on gathering charges, because of feedback that board parts ought not to be remunerated for satisfying a required obligation. Expanded Records-Management Requirements SOX has cantered expanded consideration on the records-administration zone. Since 2002, numerous organizations have executed email chronicling frameworks to permit productive recovery of email in the occasion it is subpoenaed for cases identified with administrative or private prosecution. The product frameworks file email, as a rule on reinforcement servers, as indicated by organization pointed out indexing frameworks (Swartz 4). Later pursuits by the key things will permit the whole message to be recovered for survey. Compensation Increases The Lucas Group, an expert enrolling firm, in its 2005 report showed solid employing development in positions expected to meet Sarbanes-Oxley consistence. This development sought after has affected compensations for bookkeeping and money experts. Robert Half Internationals 2005 Salary Guide estimates that beginning pay rates for bookkeeping and account experts will build a normal of 2.4% one year from now (Swartz 4). In any case, the aide reported twofold digit normal increments for specific zones of accountancy realizing increments in internal examiners in large enterprises (12.5%), internal examiners at fair size enterprises (16.8%), managers largely in open bookkeeping firms (10.2%), senior bookkeepers in large open accounting firms (11.7%), and entry-level experts at little open accounting firms (11.4%). Increment in Audit Fees Respondents to a study by the Financial Executives Institute in 2003 expected review charges expanding by 30%. In 2004, the FEI respondents expected expenses would increment by half. The substantial expands connect emphatically with the expanded time that examiners report using on reviews; Deloitte & Touche, LLP, evaluations investing 40% to 60% additional time on reviews subsequent to SOXs execution. Impact on SEC Sanctions The SEC must be aware of the oligopoly conditions among the Big Four in the review market when settling on authorizations for bookkeeping firms. In 2004, a court activity by the SEC denied one of the Big Four from tolerating new open organization reviews for six months, because of the companys infringement of review freedom administers (Solomon C1). The length of time of the suspension period may come from thought of the restricted rivalry as of now existing in the review business. Each one firm has different industry specializations, so there may be one and only or two organizations that offer ability in a particular industry. Effect on Private Companies Privately owned businesses with no expectation of opening up to the world, and those without weight from outside gatherings, for example, banks or inspectors, are not, by statute, affected by SOX, yet may decide to specifically consent to its procurements. A latest PricewaterhouseCoopers review of 340 CEOs of privately owned businesses found that marginally more than one quarter have embraced SOX "best practices"(Solomon C1). Data demonstrates that the organizations most inspired by embracing best practices have a tendency to be bigger private organizations (averaging $74.2 million in incomes) (Solomon C1)and that these organizations decide to apply SOX procurements predominantly in the zones of administration and straightforwardness, bringing about certain particular best practices that privately owned businesses have received, which include CEO/CFO confirmations of money related proclamations, developing an inner code of morals, appointing autonomous board parts and a review advisory group, creating methods for reporting concerns, and splitting review and non-audit benefits between divide. Conclusion The provisions of the SOX in the management of the corporate sector streamline the interactions of management, staff, accounting firms and the government. The most beneficial element to the act is transparency, which is effective in the elimination of venues through which monetary scandals can be initiated. The managerial boards of businesses, in both the public and private sector are assigned rules and regulations that ensure investors’ interests are protected. For instance, in the UAE, this is an important benchmark in developing the region considering the number of interested parties are keen on making investments in the oil rich region. It is recommendable that the UAE incorporates the SOX in its business and corporate governance approach. Works Cited Agami, A. Reporting on internal control over financial reporting. The CPA Journal, (2006, November): 6. Beasley, M. and D. Hermanson. Going beyond Sarbanes-Oxley compliance: Five keys to creating value. The CPA Journal, 74.6. (2004, June): 16. Blaskovich, J., and N. Mintchik. Post-Sarbanes-Oxley audit planning. The CPA Journal, 77.10, (2007): 30-33. Carney, W. The costs of being public after Sarbanes-Oxley: The irony of ‘going private’. Emory Law Journal, 55. (2006): 8. Chan, A. The benefits of early controls assessment: Prevention is better than a cure. The CPA Journal, 76.11, (2006): 6-9. Farrell, Greg. America Robbed Blind. New York: Wizard Academy Press, 2005. Print. Grumet, L. Rethinking Sarbanes-Oxley. The CPA Journal, 77.11, (2007, November): 5. Hill, N., J. McEnroe, and K. Stevens. Auditors reactions to Sarbanes-Oxley. The CPA Journal, 77.7, (2007, November): 6-11. Kimmel, Paul, Jerry Weygandt, and Donald Kieso. Financial Accounting, 6th Ed. New York: Wiley, 2011. Print. Kohn, Stephen, Michael Kohn, and David Colapinto. Whistleblower Law: A Guide to Legal Protections for Corporate Employees. New York: Praeger Publishers, 2004. Print. Kuschnik, Bernhard. The Sarbanes Oxley Act: "Big Brother is watching" you or Adequate Measures of Corporate Governance Regulation? Rutgers Business Law Journal, (2008): 64–95. Shakespeare, Catharine. "Sarbanes–Oxley Act of 2002 Five Years On: What Have We Learned?". Journal of Business & Technology Law, (2008): 333. Solomon, D. Sarbanes and Oxley agree to disagree. The Wall Street Journal, (2003, July 24): C1. Swartz, N. Executives praise SOX but seek changes. The Information Management Journal, (July/August 2005): 4. Tackett, J. Sarbanes-Oxley and audit failure: A critical examination. Managerial Auditing Journal, 19.3, (2004): 6. Read More