With a number of scandals such as Enron and Worldcom that shocked the financial world, a bill was passed that required the individual certification and disclosure of top management of financial information with absolute accuracy, known as the Sarbanes-Oxley Act of 2002 or SOX. Aside from this, punishment for fraudulent financial activities became more severe, among other things. Although the act had an overwhelming vote from the House and the Senate, at 423 and 99, respectively, there are still opposing views on about the bill. Let’s take a look at what the supporters and critics have to say:
List of Pros of the Sarbanes-Oxley Act
Supporters of the Act claim that since one of its major elements is to require senior executives to take responsibility in the accurate disclosure of financial information, there is more control on the behaviors of these corporate officers and at the same time there are appropriate penalties for violating these regulations. That said, fraudulent activities will be exposed.
2. Protection of Shareholders.
Advocates for the Sarbanes-Oxley Act say that with this law, share holders will be given accurate information about the finances of the companies they intend to invest in such as assets, debts, risks profile as well as transactions. This will protect the interests of potential investors from being lured into putting their money in shady investments.
3. Prevention of Misinformation.
With the Act dictating on what corporations should do and the existing mandate on the accurate reporting of top executives, on top of the consequences they will be facing for non-compliance to the bill, shareholders and the public are assured of accurate financial facts, including balance sheets. This will also increase the confidence of potential investors.
List of Cons of the Sarbanes-Oxley Act
1. Weakened U.S. Competitive Edge.
According to critics of the legislation which include then NYC Mayor Michael Bloomberg and Democratic Senator Charles Schumer, the enactment of the bill was one of the reasons the country’s market share was dwindling and its leverage over other international financial service providers was experiencing reduction.
2. High Costs of Internal Control.
Opponents of the Sarbanes-Oxley Act say that compliance, reporting and audit entail expenses and with the act, these costs have soared. Despite strict regulations, there is no system for this and each corporation will have to figure out on its own how to abide by the regulations of the act and for this, money needs to be invested.
3. Low Number of IPOs.
After the enactment of the SOX, there have only been six Initial Public Offerings on American Stock Exchanges in 2008 as opposed to less than three hundred years prior to the legislation. This is because of the incentives offered in the regulations of the law for de-registering from the US stock exchanges and this has affected capital markets. Also, with the lower number of IPOs there are also lesser jobs.
The controversy whether the SOX is beneficial or detrimental to the economy and the finance industry is still on-going, despite its existence for more than a decade. However, many corporations were able to adapt to these regulations and have even used this Act to improve their business operations.