This article discussed the reasons why the Sarbanes-Oxley Act was enacted. The corporate fraud and dishonesty the was present in companies such as Enron Corp, WorldCom, and Adelphia Communications, Inc. required the Federal government to enact legislation that would protect the free enterprise system within the United States.
The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB) that is responsible for regulating accounting firms that perform audits of publicly held companies. The PCAOB was established as a result of an accounting and auditing firm, Arthur Anderson, acting unethically and allowing large corporations to mislead investors and falsify financial statements. The PCAOB is responsible for tightening accounting standards and disciplinary actions. The board conducts investigations and levies fines against any company found in noncompliance with the Sarbanes-Oxley Act.
Passage of any law or act will have some negative side-effects. The Sarbanes-Oxley Act (SOX) has affected Corporate Executive Officers (CEO's), and the Board of Directors (BOD), of all publicly held companies. The CEOs and BOD's have to "focus so intently on legislative issues that they have been distracted from fully focusing efforts on their business' primary operations and creating shareholder value".
Another adverse effect is the amount of money companies are spending in order to comply with SOX. The SOX requirements has meant an increase in outsider auditing fees companies must pay in order to stay compliant with the new regulations. In essence SOX is decreasing shareholder value when it was actually meant to increase shareholder value. There is a possibility the legislation could result in companies moving operations to other countries with less stringent rules. Conclusion
Enacting SOX was a result of unethical behavior by executives at some of the larger publicly held companies. Unfortunately, other...