Researching the Sarbanes-Oxley Act

The legislation came into power in 2002 and launched foremost transforms to the guideline of financial performance and corporate governance. This Act was passed by President Bush. It was named after its creators Senator Paul Sarbanes and Representative Michael Oxley. It also places various time limits for compliance. It was very helpful in reducing the fraud placed by executives and co-workers working in the corporations. The Sarbanes-Oxley Act is approved into eleven labels. As long as compliance is considered, the chief essential titles within these are mostly believed to be “302, 401, 404, 409, 802 and 906”. A long-lasting public company accounting board was also established under the Sarbanes-Oxley Act and it was mainly responsible for hosting public relations and ensuring that rules of SOX 2002 are implemented by companies and auditors (Soxlaw, 2006). A tough fundamental emphasis of the Sarbanes-Oxley Act is to improve the reliability of the audit procedure and the consistency of annual reports on issuers’ financial disclosure. For this fact, the Commission has taken the measures introduced by the Act and, when suitable, practiced further measures with the objective of re-establishing public self-belief in the liberty and performance of auditors of public listed organizations’ financial reports. In endorsing the Sarbanes-Oxley Act, Congress acknowledged that international accounting standards that include too many exemptions, explanations and bright-line percentage tests could have contributed to hard work by co-workers and accountants to formulate transactions that offer a preferred accounting effect and yet allocate the company to evade apparent disclosure of the financial penalties of those transactions in its financial reports. Consequently, Congress authorized the implementation of an accounting system in the US that is based on “principles-based” accounting standards (Donaldson, 2003).


In the year 2001, the United States of America witnessed the biggest and most stunning impoverishment in its history. Enron, Tyco as well as WorldCom were shambled. Thousands of financiers, shareholders and investors lost their business and a high amount of dollars. Investors’ self-reliance was highly traumatized, and this encouraged Congress to progress the precision and dependability of corporate revelations. The Sarbanes-Oxley Act was formed to defend investors and shareholders from commercial accounting scams. This Act was named after Sarbanes and Oxley, and is mostly known as “SOX” and “Sarbox”. The official title of the Act is “The Public Company Accounting Reform and Investor Protection Act of 2002.” The SOX is measured by many to be the leading refurbishment of U.S. securities set of laws from the time of the New Deal (All Business, 2010).

President Bush passed this law and signed the Sarbanes-Oxley Act. In spite of remarkable corporate and accounting rumors, the Act symbolizes the most imperative securities legislation. The Act causes spectacular modification across the corporate background to reinstate investor self-assurance in the reliability of corporate revelations and financial reporting. The initial time period of the Sarbanes-Oxley Act has created a remarkable record of achievements in an unbelievably small period of time. The Act places striving deadlines by the Commission to execute many of the Act’s requirements and was basically for most of the rulemaking ventures. The Commission offered various opportunities for public input on its plans (Donaldson, 2003).

The major pre-requisites of the Act include a number of aspects such as; “Chief directors and financial administrators are considered accountable for their firm’s financial reports, insiders trades are prohibited during pension-fund blackout periods, provisions of executive compensation and profits is mandatory and many more” (All Business, 2010).

Events Leading to Sarbanes-Oxley

The particular proceedings that led to the Sarbanes-Oxley Act are now clearly acknowledged. The economy in America in the mid-nineties thrived and the vastness of the difference caused by it was portrayed by the stock market. There was a substantial rise in the stock averages between the mid-1990s and early 2000. The new entries, taking responsibility for the IPOs in the market achieved the most from this economy and particularly, the internet-based region prospered. Several people were brought to the stock exchange with their funds due to development in communications, the flare-up of information accessibility and the revolution in the tradition of impartial dealings together with the transfer to more independent retirement accounts (Donaldson, 2003).

The economy disintegrated in mid-2000 accompanied by the sudden plunge in the stock prices. Shareholders withdrew from the marketplace. The IPO market vanished which escorted to several other disclosures in 2000, just as it occurred in the break-down in 1929. Firstly, it was evident in October 2001 that the Enron market together with the companies like Adelphia, Tyco, WorldCom and many others blossomed as a result of deception, transgression and clear disobedience of the business rules. It was now clear that the eminent IPO market was quite deficient in injustice and veracity. Though the dismal drop of 2000 was not as vigorous as that of 1929 where the number of investors was huge, the shareholders endured a great loss.

To tackle the prevalent fall down of the poise of the investor and the discovery that something was critically off beam in the American corporate sector, Congress officially agreed and the President endorsed the Sarbanes-Oxley Act. The President vowed at the East Room ceremony and said, “To use the full authority of the Government to expose corruption, punish wrongdoers, and defend the rights and interests of American workers and investors” (Donaldson, 2003).

Regulations of Sarbanes-Oxley Act

This law is required for the New Public Company Accounting Oversight Board also known as PCAOB, CPA firms and other organizational bodies and members (NYSSCPA, 2010). The Sarbanes-Oxley Act of 2002 is a foremost restructuring enclosure authorizing the most comprehensive transforms Congress has obliged on the corporate world ever since the New Deal. It looks for preventing upcoming scandals and re-establish investor assurance among other effects, constructing public corporate accounting oversight board, improving auditor sovereignty regulations, streamlining corporate governance values and considerably rising the criminal consequences for contraventions of securities laws. PCAOB is established to standardize accounting expertise who reviews the financial reports of public companies. The board’s procedures are focused on direct and considerate SEC oversight. According to one article, “It according to the act is not a government agency and will be made up of five full-time prominent individuals of integrity and reputation.” Two members must be or must have been CPAs” (Miller & Pashkoff, 2002). For public accounting companies, overseas or domestic, those who contribute to the research or issuance of any financial report with respect to a legal corporate will pay registration and annual fees. These fees will be gathered from every CPA firm which will be utilized and adjusted with the costs of processing and assessing procedures and annual statements. . PCAOB should approve a law to entail registered CPA firms to organize and sustain audit work papers and other statistics associated with an appraisal for at least seven years in adequate detail to maintain the conclusions (NYSSCPA, 2010).

Implementation of Sarbanes-Oxley Act

The comprehensive developments in the Sarbanes-Oxley Act address almost every characteristic and performer in our nation’s capital markets. The law influences all reporting organizations, both domestic and overseas, as well as their executives and administrators. The Act also influences those that co-operate a role in ascertaining the reliability of our capital markets, accounting corporate, research forecasters and attorneys. The exceptional goals of SOX 202 are comprehensive and contain re-establishing investor self-belief and confirming the reliability of our markets. According to these values, the foremost aims focused upon in the SOX can be distinguished on the basis of various features. The first is to reinforce and re-establish assurance in the accounting career. The second is to fortify enforcement of the centralized securities laws. The third is to progress the “tone at the top” and directors’ accountability. The fourth is to strengthen revelations and financial reporting, and the last is to create and develop the presentation of accounting gatekeepers (Donaldson, 2003).

Criticism on Sarbanes-Oxley Act

A collection of companies came together less than three years after the misconduct of the companies like Enron, WorldCom and Global Crossing was exposed. These companies reacted against the procedures to check such accounting calamities. Many of these companies were Washington-based business campaigners who maintained that some of the requirements of the law were weakening the businesses from the expenditure point of view, and are planning to push for certain changes in the Sarbanes-Oxley Act (Rich, 2005).

This Act was originally sketched to set up reins on the accounting and further financial administration in order to make the business authority safer and guard the financiers. The conflicting requirement of the Act was Section 404 which commanded strict control and an all-embracing strategy for public companies asking them to protect, provide written proof, process and validate substance information related to economic consequences. This act, which was extremely expected but much feared, was launched on the 15th of November 2005 (Rich, 2005).

This group targets that the aim of this provision comes to success as long as it applies to a firm of 250,000 people but when it comes to 250 people firm; its objective is no longer achieved. A CFO journal claims that the cost to keep up the gearshift of these companies can reach an astounding $500,000 per annum. The activist group alleges that this cost, including the withholding of the examiners, is just suitable for large companies but cannot be reached by smaller firms. The Securities and Exchange Commission has started to weigh up the effect of the Sarbanes-Oxley Act on small-scale corporations due to the increasing pressure by the opposing group (Rich, 2005).

Effectiveness of Sarbanes-Oxley Act

The economy and investors are worn out as ever, and Sarbanes-Oxley Act has done a lot to avert fraud. Due to this fraud, Enron and WorldCom have faced a lot of consequences and have led these leading organizations to bankruptcy. It looks like that to some extent the fraud has been dissuaded at the corporate level, although it runs extensively throughout the financial corporations. In the initial years of 2000, financiers and co-workers of the companies concerned were distressed when enormous corporate fraud issues appeared. This scam was accounted from the leading officers in the left investors, organizations, institutions with valueless stocks and workers with no employment (Fuller, 2010).

It was the moment to restructure, and the federal government Sarbanes-Oxley was the response to business swindles. SOX was anticipated to create these high-status officials accountable for the authenticity of all financial reports released publically. It also places actions in a position to avoid public accounting organizations from receiving frauds and the executives involved in the companies for which they organized financial reports. Despite the fact that Sarbanes-Oxley was an excellent idea, however, it turned out to be extremely expensive for organizations trying to execute these latest procedures in order to fulfill. At the moment a situation was aroused, the firms that were accountable for the start of this fraud terror have doubled, and the companies that were sincere are paying a firm consequence (Fuller, 2010).

Despite the fact that Sarbanes-Oxley was an excellent idea, however, it turned out to be extremely expensive for organizations trying to execute these latest procedures in order to fulfill. At the moment a situation was aroused, the firms that were accountable for the start of this fraud terror have doubled, and the companies that were sincere are paying a firm consequence. As a result, these sincere organizations are struggling to endure between the poor economy and immense costs to maintain their costs and earnings fraud-free (Fuller, 2010).

Sarbanes-Oxley verified that legislation is not only the solution. It mainly emphasized ethics. Businesses should work according to ethics rather than profits. If the companies start leading towards norms and ethics guidance and prefer honesty to be the number one factor, then it will ultimately give the business higher profits. Eventually, fraud will start diminishing. This set the foundation for a corporation to flourish for several years as a morally truthful business rather than a profit-driven firm that goes into loss quickly (Fuller, 2010).

Improvement in Corporate Governance

Sarbanes-Oxley Act lays rigorous procedures on corporate governance, and several directors are rushing to convey their businesses into acquiescence. The commerce press in current months has been subjugated by effects of corporate rumors, and numerous well-appreciated companies have had to considerably reaffirm their earnings. The commerce press in current months has been subjugated by effects of corporate rumors, and numerous well-appreciated companies have had to considerably reaffirm their earnings. It was stated in Washington Post, “Investors increasingly demand full transparency of accounting policies and their effects” (Krappe & Kallayi, 2010).

In July of 2002, representatives accepted the Sarbanes-Oxley Act to facilitate reinstating belief in corporations. The most comprehensive transform in corporate governance ever since the Great Depression, the SOX 202 is planned to avoid business and accounting fraud by escalating the clearness of corporate economies, guidelines and procedures. The Sarbanes-Oxley Act consents that businesses build up sound in-house controls as well as offer appropriate and precise confession of financial infrastructure to investors. The Act also indicates omission and penalties to facilitate enforcement of these necessities. Whereas most corporations spotlight features of the Sarbanes-Oxley Act that administrate financial deals, the Act also has allegations for the business contracts that inspire each financial contract. Most companies are not prepared to operate and manage these specific concerns. Contract management software has appeared as a prevailing answer that offers organizations superior visibility into agreements, allowing the power and disclosure essential to fulfill the requirements of the Act. It has helped the corporate governance to implement policies and procedures in a more detailed and appropriate manner (Krappe & Kallayi, 2010).

The Pros and Cons of the Sarbanes-Oxley Act

There are many positive as well as negative aspects of the Sarbanes-Oxley Act. Sarbanes-Oxley set long-lasting procedures for auditors who desire to work for previous customers and prepared company management personally accountable when financial proceedings are imprecise. The Securities and Exchange Commission was endorsed to prohibit violators from helping as representatives or executives of publicly traded companies. It now compels criminal punishments for obliterating, hiding or changing reports to hinder a federal inquiry. This law was passed in 2003, and it was implemented by large corporations. Businesses having less than $75 million in corporate capitalization were ascertained extensions (San Antonio News, 2007).

On the other hand, the opponents say the law’s prerequisite that all internal controls be assessed is highly indistinct and involves the expensive evaluation of items that are not shown on financial statements. “The Competitive Enterprise Institute, a limited-government think tank in Washington, D.C., has suggested that annual audits are not required by the law” (San Antonio News, 2007). The companies are spending a massive amount of money to fulfill the SOX 202 requirements. In the year 2005, the firms having less than $1 billion profits were paying almost $2.9 million to fulfill the procedures of this Act. According to the research at Eastern Washington University, in the year 2006, the record-keeping necessities may have dejected some preliminary public offerings and embers some joint ventures, acquisitions as well as some of the mergers. Some corporations have removed their listings from U.S. stock exchanges and have a heading towards the London Alternative Investment Market. According to one finding, “A New York City-funded report released last month showed the city had lost 0.7 percent of its financial jobs between 2002 and ’05 while London gained 4.3 percent” (San Antonio News, 2007)

In the Harvard Business Review, Wagner & Dittmar (2006) commented that “A number of companies have begun to standardize and consolidate key financial processes, eliminate redundant information systems and unify multiple platforms; automate manual processes, better integrate far-flung offices and acquisitions; bring new employees up to speed faster; broaden responsibility for controls; and eliminate unnecessary controls”. On the other hand, according to Henry Butler who works in the American Enterprise Institute, in his book titled “The Sarbanes-Oxley Debacle: How to Fix It and What We’ve Learned, calls SOX 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” (Cone, 2006).


From the above, the history of events leading up to the enactment of SOX 2002 is majorly marked with the eruptions of corporate scandals that not only involved the management of major corporate but also members of the audit teams who were responsible for verification of financial reports and providing assurance regarding the accuracy of accounting information. The problem was viewed to be grave and having a negative impact on the sentiments of the market and shareholders. It was the need of that time for the government and regulators to come up with a response to the situation and it was Sarbanes Oxley Committee that put forth recommendations for bringing in more accountability for the financial information disclosed by companies. The enactment of SOX 2002 has surely changed the way that audit firms perform their activities and has limited the involvement of members of audit firms in the dealings of their clients and other elements of business operations. The acceptance of SOX 2002 was not an easy task and its implementation was viewed to have serious implications for audit firms and corporations. Major criticism came from the high costs of systems and changes required for compliance with the requirements of SOX 2002 but as the benefits of its implementation became evident and appreciated by shareholders companies accept that the initial costs of implementation will be justified by its long term effects on bringing more transparency into the reporting framework. Moreover, there were significant concerns with performing the contractual terms between clients and audit firms. Research suggested that “as a result, 71 percent of the companies surveyed said the contractual risk is a major area of concern. The Sarbanes-Oxley Act also requires companies to accurately disclose these contractual risks to their boards and investors. Yet, three out of four companies did not have a reliable system in place to alert key parties when a contractual risk was triggered” (Krappe & Kallayi, 2010). It can be suggested that with the implementation of SOX 2002 audit firms and clients have become more accountable for their actions. The overall impact of SOX 2002 has been greater emphasis on corporate governance. However, with the recent financial crisis arguments have been raised that additional rules and regulations such as SOX 2002 are still not able to yield the desired results and it is more of a change in the attitudes that is required for avoidance such major financial catastrophes in the corporate sector.


All Business. (2010). What Is the Sarbanes-Oxley Act? Web.

Cone, E. (2006). Compliance: Is Sarbanes-Oxley Working? Web.

Donaldson, H. W. (2003). Testimony Concerning Implementation of the Sarbanes- Oxley Act. Web.

Fuller, G. (2010). The Effectiveness of Sarbanes-Oxley on Fraud Prevention. Web.

Krappe, K., & Kallayi, G. (2010). Contract Management: Improving Corporate Governance. Web.

Miller, I. R., & Pashkoff, H. P. (2002). Regulations Under the Sarbanes-Oxley Act. Web.

NYSSCPA. (2010). The Sarbanes-Oxley Act of 2002. Web.

Rich, L. (2005). Sarbanes-Oxley Draws Renewed Criticism. Web.

San Antonio News. (2007). The good and bad of Sarbanes-Oxley. Web.

Soxlaw. (2006). The Sarbanes-Oxley Act. Web.

Wagner, S., & Dittmar, L. (2006). The Unexpected Benefits of Sarbanes-Oxley. Web.

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LawBirdie. "Researching the Sarbanes-Oxley Act." March 22, 2023.