Sarbanes-oxley act 2002 - Essay Example

SARBANES-OXLEY ACT 2002 Institute Sarbanes-Oxley Act 2002 With the collapse of many huge organizations such as Enron, WorldCom, etc, there was a great need of proper Corporate Governance and control structure within organizations. Governance is about the strategic direction of a company and how that company is controlled. It is the system by which companies are directed and controlled in the interests of shareholders and other stakeholders. These major collapses caused a great concern for shareholders and investors around the globe resulting in a huge decrease in the confidence of both the shareholders as well as the investors.

As a result of this the U.S Congress issued an act which was later known as the Sarbanes Oxley Act of 2002. The act addresses many different issues and is mandatory upon every public organization to follow (within the United States of America). The act consists of 11 sections which range from the extra duty being enforced upon different company boards to different criminal penalties if the guidelines of the Sarbanes Oxley Act are not followed. Besides such sections, the act wants the Securities and Exchange Commission to ensure that such guidelines and rules are followed by all the respective companies or not.

The act focuses on issues such as corporate governance, internal control assessment, auditor assessment, etc. The act created a Public Company Accounting oversight board which was made responsible to manage and supervise audit companies which act as auditors of different public companies. Sarbanes Oxley Act 2002 is more of a Rules-Based approach where non-compliance would lead to heavy penalties (including some criminal prosecution as well). It is a requirement under the US stock exchange regulation to comply with SOX and a publicly held company needs to follow the act (private companies are exempt from its application).

Although Private companies are exempt from the application of the Sarbanes-Oxley Act, some of them usually follow the act to show their commitment towards good corporate governance (The Sarbanes-Oxley Act, 2002). The act was deemed really necessary at the time of the collapse of large organizations such as Enron and this this act brought many benefits along with its incidence. The act has brought many benefits to investors, shareholders and even the employees of any particular firm. The major benefit that the firm has come up is the enhanced investor confidence.

This increase in confidence is because of the fact that the act brought with itself an element of incremental transparency. Besides the transparency, the act resulted in reduced borrowing costs for companies that followed the act. Research also proved that with the inception of this act, companies were found to have much more sound internal controls and such internal controls increased the confidence of not only the shareholders, it also helped in motivating the performance of employees as well (Arping et al, 2010).

Besides these benefits, the act also had some drawbacks and the major drawback for the Sarbanes Oxley Act is its enhanced compliance costs for companies. Survey showed that companies had to tolerate compliance costs which were almost equal to 0.036% of their average revenue (FEI Survey, 2007). Top of Form Arping, S., & Sautner, Z. (2010). Did the Sarbanes-Oxley Act of 2003 make firms less opaque?: Evidence from analyst earnings forecasts. Amsterdam Bottom of Form FEI Survey: Average 2007 SOX Compliance Cost $1.

7 Million, 2007 http://fei.mediaroom.com/index.php?s=43&item=204 The Sarbanes-Oxley Act, A Guide To The Sarbanes-Oxley Act, 2002 http://www.soxlaw.com/