Sarbanes Oxley legislation - Research Paper Example

Sarbanes Oxley legislation Task: Sarbanes Oxley legislation Introduction There was a financial scandal in the United s in the early 2000s. During this time, many stockholders, creditors, and investors experienced a loss of billions of dollars (Krimmer, 2006). Due to this, the congress in the country enforced the Sarbanes-Oxley legislation of 2002. The legislation is very vital in the US corporate world. The law was passed to make the public trust and have confidence in the financial status of companies.

The legislation is only applicable to the public held companies. However, the evaluation of all the firms in the country has been affected in the legislation. All the companies in the country irrespective of their sizes have been influenced by Sarbanes-Oxley. Impacts of the Sarbanes Oxley legislation The legislation has affected the organizations’ internal control. It emphasizes the importance of efficient internal control. Firms use these processes in protecting its resources, processing information perfectly, and ensuring compliance with laws.

Sarbanes-Oxley has made many companies in the United States to maintain effective internal controls. Consequently, the companies can detect any fraud and prevent faulty financial statements. Before the implementation of the law, many companies suffered losses because of employee frauds. An example of such frauds entails overstating of expenses by employees. Additionally, workers can steal from their employers by altering the accounting records to prevent employers from noticing the fraud. Such frauds make the business information inaccurate (Warren, 2010).

The act has also influenced the business succession issues. This is after the successions scandal that affected Enron in 2000. The act affects the succession issues by advising the business board of directors to take the successions issues seriously. The legislation had also prohibited retention strategies for executives that were practiced before the implementation of the act. An example of the retention strategies is permitting personal loans to executives or retaining them as business boards’ financial packages.

Researches show that more than 60 percent of directors believe that the act has had positive effects on businesses. Additionally, more than 70 percent of the directors view the legislation in a positive way (Weiss, 2009). The legislation has also increased numbers of investors in the country. This is because it has ensured transparency in organizations. This increases the investors’ confidence in the country’s market. Based on the act, the country has become the most admired globally because its markets are well regulated (Jackson & Fogarty, 2005).

Research proves that the profitability of organizations has increased because of the implementation of the act. This is because the companies losses have reduce due to the reduced cases of fraud. Therefore, the costs of implementing the Sarbanes –Oxley are lower than the losses that companies experiences before its implementation (Zhang, 2005). The act has expanded the role and responsibilities of the audit committee of the board of directors. It requires that the auditors should be responsible for the external auditor relationship.

Additionally, it requires that the members of the audit committee should not be part of the business management. This has further increased transparency in public businesses in the US (Mantysaari, 2005). The Sarbanes-Oxley has also affected the competitiveness of the US stock market. According to researches outcomes, the country’s stock market has become less competitive. This is based on the high cost of compliance. It is expected that the numbers of public corporate will reduce. Additionally, there will be higher numbers of firms that will leave the US public market.

There will be a lower number of the new listings on the country’s market exchanges when the public market reduces. People have argued that since other countries that compete with the US do not have such regulations, the US markets will definitely be less competitive. Furthermore, the number of foreign companies in the United States will also reduce because the regulation conflicts with their home countries laws (Fletcher & Plette, 2008). Conclusion The Sarbanes Oxley legislation was introduced to increase transparency of businesses in the United States.

Before the implementation of the law, many organizations suffered losses and investors lost their money because of fraud. Additionally, the rate of unemployment in the country was high since most companies were closing down due to bankruptcy that resulted from frauds. However, after the implementation of the legislation, the companies’ internal control became more effective. This is because the restrictions of the act reduce employee frauds by enhancing transparency in organizations’ accounting departments.

Furthermore, the act has increased the number of investors in the US because the strict regulations have made investors to have trust and confidence in the US companies. However, the critiques of the legislation claim that it will reduce the competitiveness of the US stock markets because the act conflicts with other countries’ business laws (Rothwell, 2010). References Fletcher, W. H., & Plette, T. N. (2008). The Sarbanes-Oxley Act: Implementation, significance, and impact. New York: Nova Science Publishers.

Jackson, P. M., & Fogarty, T. E. (2005). Sarbanes-Oxley for nonprofits: A guide to gaining competitive advantage. Hoboken, N.J: John Wiley & Sons. Krimmer, P. (2006). The Sarbanes Oxley Act and its impact on European Companies. New York, NY: GRIN Verlag Ma?ntysaari, P. (2005). Comparative corporate governance: Shareholders as a rule-maker. Berlin [u.a.: Springer. Rothwell, W. J. (2010). Effective succession planning: Ensuring leadership continuity and building talent from within. New York, NY: AMACOM.

Warren, S. (2010). Survey of Accounting. New York, NY: Cengage Learning. Weiss, J. W. (2009). Business ethics: A stakeholders and issues management approach. Australia: South-Western Cengage Learning. Zhang, X. (2005). Economic consequences of the Sarbanes-Oxley Act of 2002. Retrieved from: http://w4.stern.nyu.edu/accounting/docs/speaker_papers/spring2005/Zhang_Ivy_Econom ic_Consequences_of_S_O.pdf