Article Review - Research Paper Example

The members of the board are not answerable to the president; moreover, they have regulatory authority over each and every public company in the US. It is pertinent to note that with the passage of Sarbanes-Oxley Act, Security Exchange Commission pegs the cost of “internal controls” for an average company in US at $91,000 per year. Commission also acknowledges the fact that the cost has increased substantially. In 2008, SEC surveyed thousands of corporations to assess the cost implications in the post SOX period and it was found that an average company needs to spend $2.

3 million to comply with the provisions of Section 404. The disturbing part is that small companies have to bear the brunt of it in a much larger proportion relative to their assets. In this survey, only 19% companies confirm that the benefits of section 404 are significant to outweigh its costs. The author argues that investors are, to a large extent, skeptical about the benefits of this law. Legal Issues The section 302 of the Sarbanes-Oxley act prescribes that senior management of the company needs to authorize the accuracy of the financial reports and section 404 is all about establishing ‘internal controls’ and reporting methods specifying the adequacy of these controls.

This legality has enhanced the cost of compliance substantially of all listed companies in the US. Managerial Perspective The whole purpose of enacting the law is to restore investors’ confidence in the companies. However, SEC survey establishes that a large proportion of the respondents do not agree that Section 404 has been able to enhance confidence of the investors in their companies. Section 404 encompasses even minor issues that place a huge burden of cost on the companies while complying with the law.

It is ironical that majority of the foreign companies are contemplating de-listing from US exchanges and many small foreign firms have abandoned the idea to enter into American Capital Markets. This means that Sarbanes-Oxley Act works as a deterrent to the small and foreign firms. Though credit raters and securities analysts, in a separate survey done by SEC, give favorable view about section 404 but at the same time admit that the benefits from Section 404 cannot be quantified. The most troublesome part is that ever since the enforcement of law, US firms have reduced their investments on research and development and capital expenditures vis-a-vis firms of other developed countries such as Canada and UK.

The reason being directors and senior managers are scared of criminal penalties involved while undertaking risky investments that are difficult and costly to monitor. This certainly does not augur well for the economy of the nation. Reference Freeman J. (2009). The Supreme Case against Sarbanes-Oxley. The Wallstreet Journal. Retrieved August 23, 2012 from