January 10th, 2018
Main Advantages and Disadvantages of Sarbanes-Oxley Act (SOX) – advantages
The Sarbanes-Oxley Act of 2002 (SOX), signed into law on July 30, 2002, has been a source of contention regarding its costs and benefits. The Act was aimed at restoring investor confidence following the demise of Enron and Worldcom, failures occasioned by accounting frauds (Louis, 2007). Apart from restoring investor confidence in the stock market, the Act aimed to improve corporate governance, enhance accuracy and reliability of financial statements, strengthen the role played by independent directors and enhance internal control systems (Louis, 2007; Hermason, 2005). The act however has faced various criticisms for instance regarding the high cost of compliance that burdens small public entities and its potential to reduce risk-taking among American public entities thus reducing their competitiveness in the global economy (Hermason, 2005). The subsequent discussion highlights the main advantages and disadvantages of the act and evaluates whether the law provides a guarantee for the accuracy of financial statements of public companies.
One of the core advantages of SOX is that it has reduced managers’ manipulation of the financial reports thus boosting the accuracy and reliability of such statements for investing decisions. For instance, investigating whether SOX mitigates earning management, Caixing and David (2011) found out that the Act hindered earnings management especially in income-increasing discretionary accrual firms. SOX has also been found to enhance market liquidity both in the short and long terms by reducing information asymmetry through enhancing the quality of financial disclosures (Jain, Kim & Rezaee, 2008). Another advantage of the SOX is providing for criminal liability thus presenting a deterrent to the individuals who could otherwise pay off to avoid legal action for their role in accounting fraud. Although whistleblowing supported by the Act could offer a deterrent to individuals who intend to distort financial information, the incentives for whistleblowing in the Act are inadequate and thus have proven ineffective in encouraging whistle blowing (Berkowitz, Tusk, Downes & Caroline, 2011; Verschoor, 2011). Go to disadvantages here