Sarbanes Oxley Act

Institution

Sarbanes Oxley Act

This 2002 legislation named after its architects Senator Paul Sarbanes and Representative Michael Oxley introduced major changes to the regulation of financial practice and corporate governance as well as set several deadlines to comply. This accounting reform law was prompted by the financial debacles of the late 90′s and early 2000′s and in response to the grossly overstated financial statements of firms such as Enron, Tyco, and WorldCom as well as the overwhelming public opinion for tighter control of corporate accounting and reporting. The legislation was projected to raise the accountability of the corporate governess in producing reliable fiscal reports for publicly traded firms (Ingram & Albright, 2007). It is calculated to restore investor confidence in corporate America following the multibillion-dollar accounting scandals in firms. It is calculated to improve the exactness and dependability of corporate disclosures that are made to adhere to the securities laws, and for additional uses (Sarbanes-Oxley Act, page 1).

This act is a contentious law owing to the excessive finances a firm requires in establishing and maintaining it. Direct and indirect costs are incurred to comply with the act. Augmented D&O insurance premiums, higher director fees owing to greater time commitments and responsibilities, higher expenses linked to internal software as well as higher costs relating to consultation fees are some issues that companies are facing to abide by this act. The costs of the act compliance influence firms, markets, financiers, and economic development in the short run. Another side effect of Sarbanes-Oxley act has been to impel firms to list on the Alternative Investment Market at the London stock exchange to avoid subjection to these regulations. The act has also occasioned the decline of initial public offerings (IPOs) on U.S. stock market.

This act was intended to ensure a large company suddenly becoming insolvent would never surprise the public again. However, Freddie Mac, Wachovia, Washington Mutual, Merrill Lynch, AIG, Fannie Mae, and Lehman Brothers showed the opposite. Conservative estimates show that the compliance burden of the act is about $33 billion yearly while shareholders lost approximately eleven billion dollars from the Enron scam. This means that the act costs the investment portfolio three Enrons (what it was supposed to prevent) annually and yet it did not protect investors from the financial meltdown of 2008 (Marotta, 2011).

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