The Dodd-Frank and Sarbanes-Oxley Acts prevent corporate fraud by providing a framework that protects financial markets. They protect investors in financial markets from fraud. Both laws contain provisions that protect whistleblowers who report incidences of fraud or financial violations (Mann & Roberts, 2015). In addition, they empower people to report any cases of financial violations n companies and organizations without any fear of victimization.
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The ACTS are very important because they prevent individuals from engaging in financial misconduct because their provisions require companies to develop compliance measures, corporate ethics, and policies to protect people who report cases of financial misconduct (Mann & Roberts, 2015).
Differences between the acts
Both Acts have differences that make their application different. The Sarbanes-Oxley Act was implemented to cushion investors against fraudulent transactions by companies while the Dodd-Frank Act was enacted to bring financial reforms that would lower risks in various areas of the economy (Kohn, 2011). The SOX Act was passed after the Enron, WorldCom, and Tyco International scandals that had far-reaching financial implications on investors, companies, and the economy. On the other hand, Dodd-Frank was passed as a way to prevent a recurrence of the 2008 financial crisis that had severe economic effects.
The SOX aimed to increased corporate responsibility and enforced transparent disclosure of corporate accounting practices (Kohn, 2011). In addition, it was passed to protect investors from the involvement of companies in financial fraud.
For example, section 302 of the Act requires companies to ensure that the information contained in their financial statements is correct (Mann & Roberts, 2015). On the other hand, section 404 requires the management teams of companies to oversee and control all the financial activities of their companies and ensure that the reporting adheres to the provisions of the Act (Kohn, 2011). The Enron and Tyco fraud cases led to great financial losses and massive loss of jobs that affected many people.
In contrast, the Dodd-Frank was passed to initiate reforms in several areas, including swaps trading, corporate performance pay, valuation of derivatives, and corporate regulations (Brigham & Ehrhadt, 2014). Many financial analysts suggested that the 2008 financial crisis was initiated by swaps trading and securities that were backed by mortgages. These trades are supposed to be traded on centralized exchanges.
However, prior to the 2008 crisis, they were trade over the counter without proper financial regulations. Many traders did not understand the risks they posed to the economy by trading in the aforementioned derivatives. In response to the financial crisis, the Act created centralized exchanges for trading (Mann & Roberts, 2015). In addition, it required traders to disclose information regarding their trading to the public.
Unlike SOX, Dodd-Frank contains additional provisions that related to commodities trading law and federal securities. For instance, Section 922 contains a provision that awards whistleblowers 10-30 percent of money retrieved from fraudulent financial transactions (Brigham & Ehrhadt, 2014). Another difference is that SOX primarily caters to the needs of public companies, while the Dodd-Frank Act covers both private and public companies (Mann & Roberts, 2015).
It is unclear whether an individual working in a private company can present reports of financial fraud against the company. Protection against employer retaliation offered by the SOX Act is ambiguous. It relies on the interpretations of federal courts. In contrast, the Dodd-Frank Act is very clear with regard to the protection offered to whistleblowers. It outlines the actions that the Act protects whistleblowers against (Mann & Roberts, 2015).
Brigham, E. F., & Ehrhadt, M. C. (2013). Financial Management: Theory & Practice. New York, NY: Cengage Learning.
Kohn, S. (2011). Whistleblower’s Handbook: A Step-by-Step Guide to Doing What’s Right and Protecting and Protecting Yourself. New York, NY: Rowan & Littlefield.
Mann, R. A., & Roberts, B. S. (2015). Essentials of Business Law and the Legal Environment. New York, NY: Cengage Learning.