Sarbanes Oxley Act


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Carmen Neghina & Hella Rieger

Sarbanes Oxley Act

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Pros and Cons

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  • The first scandals involving corporate misconduct started arising in 2000. When the Enron/Andersen scandal first unraveled in late 2001. Followed quickly by ImClone, Global Crossing and similar stories, Congress did very little to address corporate misconduct. Then came a second wave of scandals, led by WorldCom and Adelphia in the summer of 2002. These scandals, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation's securities markets. This time however Congress and the White House saw the need for action. This time the Sarbanes-Oxley act was introduced in July 2002. by Bush
  • Debate continues over the perceived benefits and costs of SOX. Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation's capital markets by, among other things, strengthening corporate accounting controls.
  • Detractors contend that SOX was an unnecessary and costly government intrusion into corporate management that places U.S. corporations at a competitive disadvantage vis-a-vis foreign firms, driving businesses out of the US. “ These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges.” According to a study, the number of American companies deregistering from the public stock exchanges nearly tripled during the year of the Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004. The reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs Sarbanes-Oxley imposes on businesses. The costs associated with being publicly held company increased by 130 percent.
  • Sarbanes Oxley Act

    1. 1. Carmen Neghina, Hella Rieger 2008
    2. 2. Content Overview Basic content Pros and Cons PCAOB
    3. 3. Overview
    4. 4. Overview <ul><li>Sarbanes-Oxley Act </li></ul><ul><ul><li>Public Company Accounting Reform and Investor Protection Act of 2002 </li></ul></ul><ul><ul><li>SOX or Sarbox </li></ul></ul><ul><ul><li>Financial practice & corporate governance </li></ul></ul><ul><ul><li>Senator Paul Sarbanes & Michael Oxley </li></ul></ul><ul><ul><li>Tremendous pressure on Congress </li></ul></ul><ul><ul><li> quick reaction </li></ul></ul><ul><ul><li>Public company boards, management, public accounting firms </li></ul></ul>
    5. 5. Overview <ul><li>“ The most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt“ </li></ul><ul><li>Goals: </li></ul><ul><ul><li>Overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies </li></ul></ul><ul><ul><li>Auditor independence, internal control assessment, enhanced financial disclosure </li></ul></ul><ul><li>SOX is aimed at eliminating … </li></ul><ul><li>… false disclosures </li></ul><ul><li>… undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers and shareholders </li></ul>
    6. 6. Content
    7. 7. PCAOB <ul><ul><li>Public Company Accounting Oversight Board </li></ul></ul><ul><ul><li>Watchdog over accounting firms </li></ul></ul><ul><ul><li>Five elected members </li></ul></ul><ul><ul><li>Funding comes from accounting firms, costs vary </li></ul></ul><ul><ul><li>Adopted three auditing standards in 2004 </li></ul></ul><ul><ul><li>PCAOB inspects the auditors at least once every three years </li></ul></ul>
    8. 8. Content <ul><li>Public Company Accounting Oversight Board </li></ul><ul><li>Auditor Independence </li></ul><ul><li>Corporate Responsibility </li></ul><ul><li>Enhanced Financial Disclosures </li></ul><ul><li>Analyst Conflict of Interest </li></ul><ul><li>Commission Resources and Authority </li></ul><ul><li>Studies and Reports </li></ul><ul><li>Corporate and Criminal Fraud Accountability </li></ul><ul><li>White Collar Crime Penalty Enhancements </li></ul><ul><li>Corporate Tax Returns </li></ul><ul><li>Corporate Fraud Accountability </li></ul>
    9. 9. SOX and Corporate Communication <ul><ul><li>State interference </li></ul></ul><ul><ul><li>Government a larger role in regulating the audit profession </li></ul></ul><ul><li>Consequences: </li></ul><ul><ul><li> the new system has to be communicated to employees </li></ul></ul><ul><ul><li> more work (resistance, dissatisfaction) </li></ul></ul><ul><ul><li> Employees have to be more controlled, which may lead to a decrease in trust </li></ul></ul><ul><ul><li> more information flow among different departments </li></ul></ul><ul><ul><li> more transparency </li></ul></ul><ul><ul><li> more corporate responsibility </li></ul></ul>
    10. 10. Pros and Cons
    11. 11. Pros <ul><ul><li>Restoring public confidence in capital markets </li></ul></ul><ul><ul><li>Strengthening corporate accounting controls </li></ul></ul><ul><ul><li>Standardized key financial processes </li></ul></ul><ul><ul><li>Elimination of redundant Information Systems </li></ul></ul><ul><ul><li>Better internal control -> accuracy of information </li></ul></ul><ul><ul><li>Increased independence between board of directors and management </li></ul></ul><ul><ul><li>Increased responsibility for financial reporters </li></ul></ul>
    12. 12. Cons <ul><ul><li>No guidance for companies </li></ul></ul><ul><ul><li>Intrusive </li></ul></ul><ul><ul><li>Competitive disadvantage vis-à-vis foreign firms </li></ul></ul><ul><ul><li>Costly, time-consuming and difficult to implement </li></ul></ul><ul><ul><li>2002: no. of companies deregistering from the public stock exchanges nearly tripled </li></ul></ul><ul><ul><li>2004: only 10 new foreign listings </li></ul></ul><ul><li>“ Reform&quot; of the accounting industry ended up being a gold mine for the very auditing firms that Congress wanted to punish, as a few mega firms thrive in a more regulated market . </li></ul><ul><li>(Wall Street Journal) </li></ul><ul><li>“ A colossal failure, poorly conceived and hastily enacted during a regulatory panic. . . . SOX supporters are dead wrong in their assessment of SOX—both logic and evidence make it clear that SOX was a costly mistake“ </li></ul><ul><li>(H. Butler & L. Ribstein) </li></ul>