Sarbanes-Oxley – Context & Theory: Market Failure
The article “Sarbanes-Oxley – Context & Theory: Market Failure, Information Asymmetry & The Case for Regulation” by Sean D. Jasso focuses on early and present-day concepts of market and backs it up with a wide-ranging debate on business failures and informational disproportionateness. To be more precise, the hypothetical backgrounds leading to the administration’s retort to the fiasco of the company are discussed in depth. The author provides a breakdown from the negotiator’s perspective proclaiming that the revocation of the Glass-Steagall Act was a motivating factor for the subsequent misconduct among the returning businesses that functioned in the same commercial sphere.
The author also characterized the authoritative power from which the Sarbanes-Oxley attains its authorized direction and execution guidelines. The multi-level enactment process necessitates more than a few years of upcoming data to investigate the outcomes more abundantly. These outcomes are represented by the results that will critically evaluate the output by executive management along with its alleged aptitude to influence commercial behavior. The author of the article states that when the law was passed, he realized that the ultimate influence at the employment level is mostly identified by the private consultations with the experts in the field – the chief financial officer and certified public accountant.
The author set an objective to determine if Sarbanes-Oxley would function properly and if it were a decent regulation at all. The ultimate finding from the field displays that the commandment has definitely brought liability, provision, and amenability to the positions of key importance in the business. Additionally, it looks as if it had obligated corporations to modernize their structures to become more ethically persuaded. Moreover, this commandment was aimed to condense the costs of this acquiescence.
Taking into consideration all the findings, Jasso confirms that Sarbanes-Oxley is a virtuous regulation in terms of being a responsive policy retorting to depraved commercial behavior. Jasso expects that the future of Sarbanes-Oxley will be disputed for quite a few years to come.
Nonetheless, Jasso sees this as a positive aspect because the sector which suffered during Enron-era will require this period to isolate itself from the remembrances of the era of scam. In addition, Jasso claims that Sarbanes-Oxley will develop so as to be in compliance with the demands of stockholders and the veracities of American and worldwide business. Lastly, Sarbanes-Oxley will guarantee the much-needed stability, even originally by vigor, to find the golden mean of respectable commercial behavior.
The major and most apparent benefit of the Sarbanes-Oxley Act is that corporations are now required to be more responsible than they were before the enactment of the law. There are currently a lot more directions for businesses on how to manage their office practices (including accounting) and a lot of actions that were available but now they are not. In other words, the Sarbanes-Oxley act tells what the company may and may not do, obliging any business to act in compliance with ethical standards if it has any desire to become successful on a long-term basis.
Before the enactment of the Sarbanes-Oxley, numerous corporations were merely misleading their stockholders with the intention of taking advantage of them. As a consequence, stakeholders were beginning to lose their confidence in businesses and eventually in the whole organization. This happened due to the fact that they were not sure of what they might or might not believe. Undeniably, this ultimately meant to produce dreadful consequences for the global economy.
Moreover, entities that were earlier responsible only for the events such as reporting fiscal data are now accountable for more than what they were responsible for prior to the enactment of the Sarbanes-Oxley act. Consistent with the latter, these entities are now obliged to follow definite guidelines with the aim of evading being held liable and exposed to the consequences of not following the directives accurately.
Even supposing that the benefits of the law are vibrant, there are also drawbacks one should pay attention to. The key weakness is that it is a pricey procedure. Following the guidelines of the Sarbanes-Oxley is a rather resource-intensive procedure. This means that a lot of financial resources will be spent only on the attempts to keep the company in compliance with the directive.
Even though the legislation has very firm directions, there are no instructions or guiding principles on how to employ the structure the act enforces. In other words, this means that every corporation has to design their own approach when it comes to doing things related to the company, and if that approach is not consistent with the Sarbanes-Oxley act, they will be exposed to the adverse outcomes. From my personal experience, I can tell that the development of the system with the intention of following the guidelines of the act would provoke additional expenses for the company.
When great expenditures become apparent without warning, the businesses have to keep an eye on the company’s budget by any means. In this case, the stockholders are the entity that is going pay for the enactment of the Sarbanes-Oxley. Moreover, these costs will majorly impact the company’s revenue.
On a bigger scale, we can realize that the core of the Sarbanes-Oxley regulation is economic transparency. This is the main takeaway from the article. Economic transparency is completely antipodal to what Enron and other companies did. They concealed the genuine performance of their corporations from the community. Economic transparency designates that a realistic stockholder, investor, or worker can review the balance sheets of the company and certainly realize what is going on.
An economically transparent corporation wishes that every individual understands its economic state of affairs because it is certain of the fact that stating things in an evident manner in terms of the company’s balance sheets leads to a more robust business. The executives and leaders in modern companies are on the edge of producing economic transparency. It is legally authorized by the Sarbanes-Oxley, and it is an upright business approach.
There are two questions that integrate the notion of economic transparency into a business:
- Do the employees believe that the management is sincere with them?
- Is there a common language that is practiced in the company when it is necessary to discuss business?
Economic transparency comprehensively answers to each of these questions. When staff, managers, and executives notice how the corporation generates incomes and how it evaluates its fiscal success, confidence rises and communiqué improves. The workers see that their efforts are not futile. The managers, in turn, have the prospects of discussing the present state and how they can improve the outcomes.
Economic transparency forms a credulous atmosphere and helps the team to find a common language. The proper behavior would appear, liability would be reestablished, and the setting in which scam prospers would fade away.