Avoiding Future Frauds with the Sarbanes-Oxley Act Essay Example for Free

Avoiding Future Frauds with the Sarbanes-Oxley Act Essay It is clear that the establishment of the Sarbanes-Oxley (SOX) act in 2002 was specific to reducing future financial fraud and imposing criminal penalties for publicly traded companies. What is not clear is whether or not the act has proved to be successful in its implementation and governance. The establishment of the act and subsequent amendments are intended to protect the public from fraud in the financial accounting of publicly traded corporations. In 2002, there were opinions both for and against the effectiveness of SOX. More than a decade later, there are still opinions on both sides of the debate. Criticism of the Sarbanes-Oxley Act The effectiveness of the Sarbanes-Oxley act has been highly criticized since its inception. One of the major contentions is that the Sarbanes-Oxley act has no provisions to differentiate the requirements for small publicly traded businesses from large conglomerates (that lead and often monopolize the marketplace). Publicly traded companies that are small in size may find the costs of compliance prohibitive to the future of their business (Coustan, 2004). Critics of SOX believe that this unnecessarily reduces the number of players in a competitive marketplace. The cost of compliance can be excessive for some smaller companies. Auditing expenses cause companies to seek private investment and become privately owned (San Antonio Express-News, 2007). Ten years ago, critics expressed â€Å"fears that small, publicly listed companies might not meet internal control reporting requirements without substantial additional expense; some may have to delist because of it. It could mean only larger companies will go public† (Coustan, 2004, p. 1). In recent years, this debate continues. Critics still express concerns â€Å"that Sarbanes-Oxley is overreaching and has placed unnecessary  restrictions on corporations that have and will continue to unduly inhibit corporate performance until they are removed† (Brite, 2013). Another major contention of critics is that the costs of compliance for outweigh the benefits in an international marketplace. Those against SOX feel that the costs outweigh the benefits and speak out in public forums stating that the â€Å"Sarbanes-Oxley has burdened the US financial market with costly rules and regulations that have reduced international competitiveness† (debate.org, 2014). There are those that openly share the opinion that the implementations of regulatory overkill through the 2002 Sarbanes-Oxley act â€Å"wrongfully make the innocent suffer for the guilty† (Gilmore, 2013). The reporting requirements of SOX are specific to businesses in the United States. Unlike American business, international business does not have the same requirements. â€Å"Regulatory compliance opposes economic costs on organizations and can affect their competitive advantage† (Srinivasan, 2014, p. 44). Increasing the cost for American business decreases competitive advantage in the worldwide marketplace. In addition to cost and competitive advantage, the structure of the bill has also been called into question. The Court of Appeals recently found difficulty with the wording of the amended 18 USC, citing that â€Å"paragraph (b) of the statute includes the word â€Å"knowingly† while paragraph (c) does not† (Bishop, 2013). The opinions of the Court of Appeals lends to the public opinion expressed in published CPA perspectives that â€Å"SOX was a hastily assembled bill† (Moran, 2013). Involved and cumbersome requirements cause confusion and frustration for companies attempting to comply with the Sarbanes-Oxley act even more than a decade after its implementation. Companies and lawmakers alike have had difficulty over the years with the interpretation of and compliance with the act. â€Å"SOX brought about many changes to the way public companies had to operate, and there was some question as to how these would stand up over time† (Moran, 2013). Positive Aspects of the Sarbanes-Oxley Act Despite complaints by critics, there are positive aspects of the Sarbanes-Oxley act that have withstood the test of time. Initial reactions have softened after smaller businesses were granted some relief in later amendments of the act. Larger businesses found that compliance with the act  increased investor confidence and contributions. In addition, the resultant increase in financial transparency has improved business relationships on many levels. First and foremost, there are many of the opinion that the enactment of the Sarbanes-Oxley act increased investor confidence and protection in the marketplace. â€Å"Does Sarbanes-Oxley prevent all bad actors from defrauding investors? No law could accomplish that. But it can and has deterred such activity† (Gillian, 2012, p. 1). Those in support of the Sarbanes-Oxley act agree that there is a positive side for investors and the businesses in which they invest. â€Å"A 2005 survey by the Financial Executives Research Foundation f ound that 83 percent of large company CFOs agreed that SOX had increased investor confidence, with 33 percent agreeing that it had reduced fraud† (Hanna, 2014, p. 2). With an increase in confidence and a perceived reduction of fraud, investors could more confidently make intelligent business decisions on the purchase and sale of publicly traded companies. Those on the positive side of the SOX act believe that the effects on small business have softened. Studies show that as companies become more accustomed to the costs of compliance, the expense decreases (San Antonio Express-News, 2007). In addition, the effects on smaller companies were ultimately deferred. â€Å"Audit standards also were modified in 2007, a change that reportedly reduced costs for many firms by 25 percent or more per year† (Hanna, 2014, p. 1). Although the costs of compliance decrease retained earnings, investors are more confident in the reliability of company reports (Gillian, 2012). â€Å"The cost of being a publicly traded company did cause some firms to go private, but research shows these were primarily organizations that were smaller, less liquid, and more fraud-prone† (Hanna, 2014, p. 1). These modifications of the act allowed more small businesses to remain competitive in the marketplace. Business relationships have also improved with increased transparency. The reduction of information asymmetry is a direct benefit to both the company and the investors. â€Å"Information asymmetry is a situation in which one party in a transaction has more or superior information compared to another† (Brite, 2013, p. 1). Periodic testing of internal controls required by SOX 404, increases transparency among internal and external stakeholders of the business. The American Institute of CPAs states on their website that â€Å"section 404B has led to improve financial reporting and greater  transparency† (American Institute of CPAs, 2006 – 2014). To evaluate the effectiveness of SOX in preventing future frauds, one must take into consideration the many different situations in which the legislation is applicable. Enactment of the Sarbanes-Oxley act increases corporate responsibility and sets restrictions on auditor services. This certainly reduces the potential for fraud; however it does not eliminate it. From a business perspective, compliance is beneficial. The costs of implementing the requirements may be high; however the benefit of increased investor confidence in a publicly traded environment is higher. There are going to be situations in which fraud is inevitable. Fraudulent wrongdoers and companies will find loopholes and the recent Court of Appeals case is evidence of that fact. As with any law, this regulation will reduce the frequency of, but not prevent, purposeful future criminal activity. References American Institute of CPAs. (2006 – 2014). Section 404B of Sarbanes-Oxley Act of 2002. believe the Sarbanes-Oxley Act has failed? -believe-the-sarbanes-oxley-act-has-failed Gillian, K. (2012, July 24). It Enhanced Investor Protection.