Also known as the Public Company Accounting Reform and Investor Protection Act of 2002, the Sarbanes Oxley Act or SOX is applied to those businesses with reporting obligations under the Federal Securities Laws and seeks to enhance assurance by tightening the regulations of the government of the corporate and accounting power practices of public corporations to regain public confidence in the equity markets. Many private companies are implementing its provisions even though the focus of SOX is on public firms.
This is to make sure that the performances made by the private firms are consistent as they view that this act would become a new standard for business conduct, enhancing the authority and internal control in their organization (Bergen, 1). Private companies which adopted the SOX confirmed that it had a positive impact on their businesses. In a few months, a majority of the companies with the SOX adaptation attested that they have updated governance procedures, improved testing and documentation, and reinforced ethics or code of conduct (Marchetti, 9).
Companies implementing the act tend to be larger and fast-growing. However, some research proved that the SOX had negative impact on some private businesses. Higher payments for external audits, increased officer and director insurance, and rising expenses related to internal audit development were reported. Moreover, 80 percent of the organization’s time has been given to compliance issues (Marchetti, 14). Although the fees to abide by the Sarbanes Oxley Act are expensive, public companies enhanced authority, reduced fraud risk, strengthened controls and developed risk management (Bergen, 5).
However, SOX was established to manage accounting fraud occurring in big capital firms and does not adjust to the size of the business. The act negatively affected small public businesses unreasonably because the expenses to revenue ratios is higher to small capital firms and is lower to large companies. Potential benefits of the Sarbanes Oxley Act has been predicted to influence markets beyond the United States as it has influenced the implementation of equally recommended provisions in foreign markets.
Private and public companies will maintain the adoption of the act as it has improved auditing standards of businesses because of the lender requirements and higher prospective. The passive obligation will enhance the worldwide adoption of these principles even for companies that are not legally obligated to comply. Companies that are active participants of the SOX would find potential benefits in governance improvement and process improvement.
If the act achieves what it originally planned, it will restore the confidence of investors in financial statement and enhabce internal understanding and give importance to financial reporting (Bergen, 14). On the other hand, Section 404 gives most problems to small firms and could probably result to fewer small capital businesses in the future and have smaller choices of foreign corporations traded on US exchange. Sarbanes Oxley Act of 2002 was implemented to keep an eye on companies and inspect the systems in an effort to protect investors and share holders. Some critics believe that the provision has been rushed.
Nevertheless, a law is needed to push through to pacify investors as some of them were pulling their money out of the markets. The greates challenge for this Act is to guarantee good governance for all companies, public and private participants, in a sensible yet money-making approach.
Bergen, Lara. “The Sarbanes Oxley Act of 2002 and its Effects of American Business. ” 2005 June. Retrieved 2 August 2007 <http://www. financialforum. umb. edu/documents/Sarbanes-Oxley. pdf> Marchetti, Anne. “SOX: the good, the bad and the future. ” 13 June 2006. Retrieved 2 August 2007 <http://www. riskmanagementmagazine. com>.