Impact of Sarbanes-Oxley Legislation - Research Paper Example

? Impact of Sarbanes-Oxley Legislation Impact of Sarbanes-Oxley Legislation The enactment of the Sarbanes-Oxley legislation came in the wake of scandals in the corporate and business world. The Act, tabled by Senator Paul Sarbanes and U.S. Representative Michael Oxley in 2002, was aimed at monitoring the activities and operations of public companies. It was meant to increase investor confidence and increase reforms in public companies. Corporate governance was the main factor behind the enactment of this Act, which required companies and corporate bodies to account for their internal controls (Brodkin, 2007). After the enactment of this legislation, the collapse of major corporations was imminent as a series of restatements began to emerge from major companies. The presence of this legislation has led to a decrease of restatements and securities class actions that have been filed. However, according to SOX, the number is still high. This paper will examine the impact the legislation had on businesses, and what the future holds for companies that do not comply with the regulations the Act has in place. The most crucial aspect of the legislation was section 404, which focuses on the monitoring of internal controls in the organization. Presently, public companies are required to include reports of internal control reports, which are then monitored by the Public Company Accounting Oversight Board (PCAOB). This board works directly with the SEC to conduct reviews. In light of the above operations, accounting firms are now liable for any, and all their audits. This is what has probably pushed for some reforms in public companies that are present in most parts of the region. Some of the major impacts that have rocked companies expected to comply with Sarbanes-Oxley legislation include; additional costs, additional liability, and even the purchase of internal control software (Harwood & Simmons, 2012). Expected impact of SOX Depending on the size of the company, the costs incurred due to the annual audits carried out by the PCAOB and SEC, vary greatly. If the company is small, the expenses incurred might be less. The contrary is also true for large-size companies. In this case, the company then pushes the extra expenses onto their clients, who knowingly or unknowingly pay for these expenses. The purchase of internal control software has increased the costs that companies, small and large, incur during their annual reviews (Brodkin, 2007). In order to build a control system that works, companies are required to hire skilled personnel to handle these issues. This, ultimately, comes at a price. The cost of planning, tracking, and reviewing internal controls in no easy task, and the outside assistance requires capital. All these factors contribute to the high prices, but it is tantamount for companies to do this. The labor workforce and human resource that is present in most companies was also a factor to consider with the Sarbanes-Oxley legislation. These groups of individuals were at the forefront in pointing out the shortcomings of corporate governance. The issues were that management in most of the financial and accounting institutions were benefitting at the expense of the labor workforce present in their organizations (U.S. SEC, 2009). To most of the individuals in this group, the Sarbanes-Oxley legislation was a means of bringing management to account for all their conducts in their organizations. Some of the aspects of the labor workforce that were expected to be addressed by the SOX legislation included; the protection of whistleblowers, proper procedure of handling and tackling complaints (privately), and even the issue of executive pay and compensation. Unexpected impact of SOX After the implementation of SOX, some fields were first to be hit by the waves of transformation. One of the major fields to be hit was the IT field, which experienced some unexpected turns. The rapid implementation of internal controls saw the use of technologies in almost every company that needed the integration of internal control software. Large and small companies were at the forefront in seeking technological assistance after the weaknesses and flaws of their systems were realized after the enactment of SOX (Harwood & Simmons, 2012). The congested communication systems and incompatibility of the systems in place made the IT industry flourish in the wake of SOX. Major improvements and changes have since taken place as even smaller businesses now go for internal control software for their operations. Outsourcing became one of the most crucial aspects of countless organizations. It was possible for individuals who worked in different fields, for example; the IT field, to get temporary employment fixing the security electronic systems of major companies. Innovations have led to an increasing number of security systems that protect some of the major companies in the ever-expanding market. Newer methods have been introduced by executives who wish to increase their organizational performance, and this is due to the realization that SOX is advantageous to the clients the organization is meant to serve, the organization’s patrons, and the organization as a whole. Data definitions in most large companies were being minimized; the redundant information systems were being done away with, and at the same time, platforms were being unified. All this was done as a way of trying to take advantage of the new system in place, which demanded compliance or serious repercussions if there was any failure to comply (Fass, 2003). After all has been said and done, the ability of people in organizations to reach common goals is what most organizations aim to achieve. The business environment needed monitoring and control and this came in the form of the Sarbanes-Oxley legislation (SOX). Companies, whether large or small, are having to bear the responsibility of being mindful of the actions and operations of their executives, employees, and stakeholders. It is tantamount that they do this lest they face some of the repercussions that have faced the likes of companies like Enron and WorldCom (U.S. SEC, 2009). These are major companies that went under after the realization that their operations and actions were wanting. This was in accordance with the laws that were in place to protect the interests and wellbeing of their clients. In conclusion, companies are required to follow stipulations in SOX. The expected and unexpected results of the legislation are seen in today’s financial companies. As companies strive to increase their accountability, the enactment is there to ensure that they do not loosen their grip. This is done in a bid to increase the confidence placed on them by their clients (Brodkin, 2007), because this plays a tremendous role in the growth and development of the business and corporate world. However, the enactment of SOX is yet to reach its full potential. The business and financial environment is still volatile. It may take a while, but the aim of SOX will be attained and all companies will take responsibility for their actions when it comes to financial operations. References Brodkin, J. (2007). SOX: Five years of headache- Sarbanes-Oxley compliance looms large for big enterprises and small companies alike. Network World. Retrieved from http://www.networkworld.com/news/2007/072607-sox.html Fass, A. (2003). One year later, the impact of Sarbanes-Oxley. Forbes. Retrieved from http://www.forbes.com/2003/07/22/cz_af_0722sarbanes.html Harwood, E., & Simmons, L. (2012). The tenth anniversary of SOX: Its impact and implications for future securities litigation and regulatory enforcement activity. Corporate Accountability Report, 10 (28), 1-7. U.S. Securities and Exchange Commission. (2009). Study of the Sarbanes-Oxley Act of 2002 section 404 internal control over financial reporting requirements. Washington, DC: Author. Read More