The Sarbanes-Oxley Act Law - Essay Example

Fraud makes the market becomes inefficient because it makes companies look good not by producing the best product and services at the least cost but by means of misrepresentation.  Companies are made to look profitable by financial acrobatics when in fact, they are not making that much. The prevalence of fraud has a grave social implication which everybody experienced recently.   The financial crisis was precipitated by fraudulent companies where investors lost their trust in the market because of frauds.

            The law intends to make the financial industry objective and ensures that the financial reports that companies release to the general public are accurate and free from fraud and prevent other companies to have an undue advantage through fraud such as the case of Enron.  This will make the market more efficient because it prevents fraud which distorts the market.

The Sarbanes-Oxley Act law intends to remove the possibility that auditing firms and companies will connive to give the public a false financial report that distorts the operation of a free market.  The Sarbanes-Oxley Act would prevent auditing firms such as Arthur Andersen to assumed the role of a Management Consultant as well as Auditor for companies like Enron.  When Arthur Anderson became a Consultant for Enron, it became in effect its employee and thus losing its independence thereby conflict of interest inevitably arise which is inimical to the efficient operation of the market.  This would be prevented with the Sarbanes-Oxley Act because the law stresses Auditor Independence that establishes the independence of external auditor to limit the conflicts of interest.

Conflict of interest leads to losing the independence of the audit report that leads to their audit certification of a company’s overstated earnings and thereby distorting the market by not reflecting the true financial position of its players.

The Sarbanes-Oxley Act also mandates the establishment of a Public Company Accounting Oversight Board which would oversee the performance and practices of Certified Public Accountants and accounting firms such as Arthur Andersen.  This oversight function is a good deterrence against accountants who may be tempted to commit any accounting fraud without the existence of the law. The Sarbanes-Oxley Act also would avoid conflicts of interest which happened at Arthur Andersen when it assumed as a consultant and an auditor. The increased penalty against accounting fraud contained in the Sarbanes-Oxley Act is also a good deterrent for any auditor or company to commit fraud.

If this law will perform its intended result, it will prevent the fraud that distorts the mechanism of a free market thereby allowing it to operate efficiently.