Historical Summary of SOX Enactment

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The SOX Act was enacted due to corporate chaos like Adelphia, WorldCom. The Congress was pressurized from the public to address the unruly behavior of the executives of the companies engaged in public trade. The main aim of the act was to increase the confidence of the people on the financial market. The scandals also led to the shameless disrespect of the Generally Accepted Accounting Practices. The loss that accrued to WorldCom in 2001 was covered by a sum of 3.8 billion dollars. There was also an overstatement of profit of 586 million dollars by Enron. The investors were fooled by this overstatement of profits and this resulted in plummeting of the stock prices of the company. The obvious results led to company being bankrupt and investors losing in millions. Life savings of the employees of Enron was lost due to the bankruptcy (Anand, 2007). Arthur Anderson who was the audit firm of the company also became bankrupt. After the SEC had started an inquiry over Enron, Anderson revealed all the documents of the company. Tyco scandal was due to immoral and unethical behavior of the corporate firms. The CEO and CFO of the company Tyco was caught stealing 150 million dollars of the company (Sherman & Chambers, 2009). The family of Rigas was caught stealing 3.1 billion dollar and was supported by Adelphia. There was overstatement of capital expenses and hiding of debt by Adelphia. The jury of the federal court convicted CEO and CFO of the company Adelphia on the charges of   looting about 100 million dollars, concealing an amount of 2 billion dollars in debt and revealing false financial and operational details to the public (Anand & Tarantino, 2010). There were similar other stories like this that showed that the abuse of power by the corporate. The Act Sarbanes-Oxley was presented by Senator Paul Sarbanes who happens to be a Democrat from Maryland and Michael Oxley, a Congress man from Ohio the bull was signed by the former president George Washington Bush on 30 July 2002.

The key components of SOX are the need to produce Code of Ethics for the senior financial members and also the mechanisms of enforcement.  The auditors coming from outside should given tenure of maximum five years and then consider a rotation for them. The other significant factors that need to be considered are independence of directors, responsibility of audit, nomination of committees and providing compensation, ethics guidelines, control and procedure disclosures, control over internal reports of finance etc (Valentin Dijksman & Chiche, 2000). Before the SOX implementation the committee of Audit took the responsibility of accuracy of finance with due respect to internal control of finance. The independent auditor of the company is chosen by the committee of Audit rather than the CEO of the company (Brewer, 2006). The committee of audit was appointed by the Board of Directors after the enactment of the SOX act. Before the SOX enactment it was the responsibility of the CEO to choose the committee members of Audit. This, as a result, has prevented many conflicts to be based on interests. In case of Tyco, the CEO has also become the Board of Director’s Chairman. This led him to take advantage of his powers and was successful in looting the company of its resources. Criticism arose on the part of the Board of Directors for not taking proper actions regarding this (Garner, McKee & McKee, 2008). After the SOX enactment, the committee of audit assisted the board of directors to take a look over the finances. The responsibilities and duties of the committee of audit was to look into the  financial reporting,  monitoring the reporting and independence of the individual auditors of the company and maintain a communication with the board of directors, the management and the individual auditors. When then Board of Directors and the auditors meet they generally discuss on how well they are meeting the requirement of the SOX Act. The company must follow the sections of 404 and 302. According to section 302, the CEO needs to leave the control on internal auditing and financial statements of accuracy (Jackson & Fogarty, 2005). Section 404 defines on how the management can take up control in assessing the internal control. 

Ethical components of SOX

The Act suggests that individual companies should enlist some Code of Ethics to be followed the senior officers of finance (Orin, R.M, 2008). The officers of the company must be socially responsible towards the customers, employees, stakeholders, and stockholders. The corrupt steps taken by the company’s officers led to spoiling of the reputation of the company and also hurt the sentiments of the employees and the investors. The aim of the SOX act was to prevent the harmful actions of the company to affect the society. There are instances that showed that SOX had a significant effect.  The most evident fact was no revelation of corporate scandal since the year 2002 .  In a forum in New York, Senator Sarbanes and other debated on whether the act was successful or not (Kaplan & Kiron, 2004).  He said in the COMMIT Forum that it was a very necessary safety instrument that made investors trusts the statement of finances. The law helped in solving the accounting problems and also helped in unearthing the problems in the system. The act helped in forming independent board of directors according to Zhu, Zhang and Ding. A study by them on 500 companies that included 64 different industries showed CSR with the presence of women directors and outside directors. According to Krishnamurthy and Cohen, the SOX Act has been effective but they feel that it’s too much focused on the directors of the board to the rules of accounting. This has led the act to miss out on the 2008’s financial crisis. Too much focus on the requirements of SOX led to less focus on the corporate strategies and also the things related to technology advancement in relation to business environment. This also leads to the question that what social responsibility motives would be.  The main motive would be to earn profits. Through profits, the company can continue to pay its employees and provide dividends to its shareholders so that they are not affected by the poor decisions of business and will help in continued investment in the economy. SOX have affected the CSR as it sees profit as the best way to help the society.

With the enactment of the SOX law, the critics felt that it was a burden on the public companies. It was a costly affair for the company to comply with the sections 302 and 404.  It was a common affair to have accounting cost of more than a million dollar (NAWA, 2007). The biotech companies felt difficulty in meeting these costs. The cost of capitalization was 15 million dollar for the company and no revenue. The small companies also faced the burden of the costs due to the implementation of the SOX Act. The company’s with less than a billion evaluations was suggested to move out from SOX according to the new law. The companies were also exempted for the first five years after their IPO. The person who favors the Act says the benefits have outweighed the cost. This has improved the investor’s position and also led to financial reporting reliability. This Act has also aroused the awareness on ethical issues among CEO, auditors, directors of the board and the employees. The critics want the SOX Act to be revised so that it becomes favorable to the small companies. SEC softened few requirements and also pushed the deadlines back for a few companies.  It was suggested that the Act was valid and was best suited to the interest of the country (Karanja & Zaveri, 2014). Congress agreed to the conditions of the SOX Act.  It was found by Martin, Newman and Akhigbe that the SOX’s wealth effect favored the large firms that gained benefit from an asymmetry of information. While, for the small firms it was less favorable as it involved a higher cost of compliances. There were two modes of engaging stakeholders as per Simmons and Mason. The two modes are ‘Habermasian’ and ‘Ethical Strategists’.  The approach of the Habermasian required the importance to be placed on ethical purity rather than cost. The approach of Ethical Strategies suggests that there should not be any differences between strategy and morality.

Social Responsibility on the publication of Corporate Ethics

A suggestion to improve the SOX legislation is to remove all the interests that aroused conflicts. The SOX does not allow the audit firms to provide consulting services. This is a very good step that has been adopted because Andersen less revenue from the services and more revenue from consulting. Still there are conflicts of interests. This was reflected by the newly formed PCAOB. The appointment of the five-member group was not done by the president (Kessel M., 2011).  The decision to hire and fire vested on the SEC. This led to a violation of the Separation of Powers as suggested by Sarbanes in 2008. It was felt that as PCAOB was the governments arm so it would be better if the President appointed the board members.

The other ways to improve the SOX is concerns on the five-year tenure of Auditors and then a rotation. A better way of rotating was to include rotation of the entire firm. The area that has already shown an improvement is the protection of the Whistleblowers. They are been provided protection by the Whistleblowers office of SEC, reforms of The Dodd-Frank Wall Street and Consumer’s Protection Act of 2010. The employers can no longer make any discrimination against the whistleblower according to the law. A report can be filed by the Whistleblowers anonymously. The Dodd-Frank Act gave more provisions to the whistleblowers under the SOX Act by including the public company’s employees and also the employees of the private affiliates and subsidiaries. There was an enhancement of the legislation of the Whistleblowers recently (Lahti & Peterson, 2005). The US Supreme Court stated in 4th March, 2014 that the protections of the Whistleblowers were not only for the employees of the public companies but also for the employees whose contractors   are owned by private companies and employees of subcontractors of public companies (Mesa Graziano, 2003). The legislation on the whistle-blowing led to the fight against the corruption by the corporate in the United States. The other way to improve SOX was the revisions proposed in 2012 by Sarbanes that would help the companies that is private to go public. More revisions in the SOX Act must be formulated so that the costs of SOX can be borne by the small companies.

References

Anand, S. (2007). Essentials of Sarbanes-Oxley. Hoboken, N.J.: John Wiley & Sons.

Anand, S., & Tarantino, A. (2010). Sarbanes Oxley in leading economies. Upper Saddle River, N.J.: Prentice Hall.

Brewer, D. (2006). Security controls for Sarbanes-Oxley section 404 IT compliance. Indianapolis, IN: Wiley Pub.

Garner, D., McKee, D., & McKee, Y. (2008). Accounting and the global economy after Sarbanes-Oxley. Armonk, N.Y.: M.E. Sharpe.

Jackson, P., & Fogarty, T. (2005). Sarbanes-Oxley for nonprofits. Hoboken, N.J.: John Wiley & Sons.

Kaplan, R., & Kiron, D. (2004). Accounting Fraud at WorldCom. Boston, MA: Harvard Business School.

Karanja, E., & Zaveri, J. (2014). Ramifications of the Sarbanes Oxley (SOX) Act on IT governance.International Journal Of Accounting & Information Management, 22(2), 134-145. doi:10.1108/ijaim-02-2013-0017

Kessel M., K. (2011). Sarbanes-Oxley over burdens biotech companies.

Lahti, C., & Peterson, R. (2005). Sarbanes-Oxley. Rockland, MA: Syngress Pub.

Mesa Graziano, C. (2003). Best practices of Sarbanes-Oxley implementation. Florham Park, N.J.: Financial Executives Research Foundation.

NAWA, K. (2007). Sequestered science and SOX Act for scientific research. Journal Of Information Processing And Management, 50(6), 367-368. doi:10.1241/johokanri.50.367

Orin, R.M, O. (2008). Ethical guidance and constraint under the Sarbanes-Oxley Act of 2002.

Sherman, W., & Chambers, V. (2009). SOX as Safeguard and Signal: The Impact of The Sarbanesâ€ÂOxley Act of 2002 on US Corporations’ Choice to List Abroad. Multinational Business Review,17(3), 163-180. doi:10.1108/1525383x200900022Valentin Dijksman, L., & Chiche, F. (2000). Worldcom. Paris: Eurostaf.