The Sarbanes Oxley Act: Success or Failure?
By: LawInfo
Published: 03/2009
After the Enron scandal shocked the world and created doubt about the accounting principles of public companies, the United States Congress passed the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act created new standards that had to be met by publicly traded companies and accounting companies. It was designed to protect shareholders from fraud that could ultimately destroy their investments and it was meant to provide certainty to financial markets that were left jittery from the series of scandals that annihilated corporate giants.
The Sarbanes – Oxley Act created certain financial reporting procedures for both public companies and their auditors. Senior executives and auditors were given specific responsibilities to ensure that the financial reporting from public companies would be truthful in the future. Financial reporting has to happen according to certain procedures and at certain time intervals. The penalties for not complying with the requirements of Sarbanes – Oxley include both civil and criminal charges that can result in significant fines and prison sentences.
Applicability to Private Firms
The Sarbanes – Oxley Act created the Public Company Accounting Oversight Board. The purpose of the Board is to oversee the auditors of public companies. Accounting firms that are not registered with the Board cannot audit public companies in the United States. However, for many years after the creation of the Sarbanes – Oxley Act the Securities and Exchange Commission (S.E.C) waived the requirement for privately held firms. This wavier allowed the accounting firm that was responsible for auditing Bernard L. Madoff Investment Securities to avoid registering with the Board and to avoid the type of governmental oversight that Sarbanes – Oxley was designed to create.
After news of Bernard Madoff’s Ponzi scheme broke and its devastating effects on individuals and financial markets become apparent in December 2008, the S.E.C. allowed the waiver to lapse and as of January 2009 it now requires auditors of privately held firms to register with the Board and to be held accountable for the ethical and professional standards set forth by the Board.
Has the Sarbanes – Oxley Act Been a Success?
The success of Sarbanes – Oxley is often debated. Those who criticize the Act claim that the Act is unnecessary and too expensive to implement. The most ardent criticizers of the bill claim that not only has Sarbanes – Oxley failed in its mission to ensure honest financial recordkeeping and disclosure but that it has also stifled new business development in the United States. Some criticizers point to the Madoff scandal as an example of the failure of the Sarbanes – Oxley Act.
Yet, not all analysts share in this type of criticism. Many analysts believe that more precise financial statements are now being prepared for public companies and that shareholders have greater confidence in their investments as a result of Sarbanes – Oxley. In order for these benefits to be realized, however, the S.E.C. must ensure that all of the requirements of the Act are carefully and universally followed and that exceptions, such as those for certain accounting firms, are not permitted.
Other Business & Corporations Articles
-
Choosing your Business Entity Structure
Businesses can operate in a variety of structures, such as a sole proprietorship, partnership, limited partnership, corporation, or limited liability company. Each of … More -
How to Form a Limited Liability Company
A limited liability company (LLC) offers business owners limited liability for the acts and financial debts of the business. An LLC can be a sole proprietorship … More -
The Board of Directors Duties of Care and Loyalty
The stock market gives many Americans a chance to have a small ownership share in publicly traded companies. Stock holders, as partial owners of the company, … More -
A Breach of Fiduciary Duty
Boards of Directors have legal, and arguably moral, responsibilities to the shareholders who depend on them to run a business. Those duties are called fiduciary … More -
Are There Any Limits on Executive Compensation?
Business executives are often among the most well paid individuals in our society. They have a lot of responsibility and they are experts in their … More -
How to Name Your Business
Coming up with a business name may be harder than you think. First, think of ideas for your name that are descriptive of the business, standout and grabs … More -
How to Finance a New Business
Starting a new business is never easy, and, unless you’re independently wealthy, you’ll need some money to get started. If you aren’t lucky … More -
Advertising Your Business on the Internet
With Internet sales and advertising continuing to rise as a predominant force in today’s marketplace, it is essential that you market your product or services … More -
Due Diligence in Business Mergers and Acquisitions
Business transactions often require that many people trust a few people to make important decisions about investing money, buying or selling businesses, or pieces of … More -
Due Diligence in Business Financing
There are many times in the course of business when a business needs to seek financing in order to meet its goals. Some businesses seek financing to start their … More
