Introduction
This study investigates the benefits that inspired Representative Michael G. Oxley (R-OH) and the U.S. Senator Paul Sarbanes to propose the Sarbanes-Oxley Act (SOX) (Wolkoff 2005). The benefits of adopting the act form the specific area of study, leading to the question of, what benefits inspired corporate entities to adopt the Sarbanes-Oxley Act (SOX)? To answer the research question, the study focused on a review of existing literature on section 404 of SOX and its burdensome nature and strengthening the internal environment.
Body
Cunningham (2002) and Lundgren (2006) say that Congress passed the Sarbanes-Oxley Act of 2002 to combat crime and ensure accurate financial reporting by holding executives accountable for their actions in the provision of accurate financial statements. However, Schwartz (2008) notes that some parts of the activities such as Section 404 were the most burdensome. Despite that, the accruing benefits of adopting Section 404 listed under Title IV of the act provides guidelines for enhanced financial disclosure, which holds managers and auditors responsible for assessing the scope and adequacy of internal control structures, procedures, and effective financial reporting as part of the annual report, known as the “internal control report.” A report by Wagner and Dittmar (2006) shows that adopting the framework enables managers to assess the adequacy of specific internal controls in the contexts of accounts and risks, evaluate the flow of transactions, determine the points at which misstatements happen, and establish whether the controls are consistent with the requirements contained in the Committee of Sponsoring Organizations (COSO) framework.
Strengthening the environment formed the basis of the second benefit. Cunningham (2002) claims that a strong environment enables organizations to develop effective governance structures for inculcating ethical values in the workers. The desirable behaviors among employees can be achieved by complying with the SOX requirements of the Internal Control-Integrated Framework on how to train employees with proper procedures (Panko and Ordway 2008). The desired values and attitudes that shape executives with honesty and integrity are defined within the framework for effective financial reporting. Some areas of concern include contract solicitation, hiring practices, employee evaluation, and objective setting. However, internal controls must be taken as the last line of defense and not the first for an organization to reap the benefits of adopting SOX.
However, the investigation answers the question of, what benefits inspired corporate entities to adopt the Sarbanes-Oxley Act (SOX)? An analysis of the findings shows that the Sarbanes-Oxley Act (SOX) provides a strong framework for restoring investor confidence and improving financial reliability and reporting. Besides, Section 404 compels managers to make honest, reliable, and accurate financial statements and hold them accountable for their reports. SOX obliges managers to ensure effective internal controls are in place for secure financial transactions. An evaluation of the results shows that besides the burden of ensuring compliance with the SOX requirements, the benefits are far much broader than the burden of complying with rigorous requirements.
Findings show that corporate entities were required to company with the Sarbanes-Oxley Act (SOX) because of various benefits such as accuracy of financial reporting, management responsibilities, enhanced financial disclosure, better internal controls, and an effective internal environment.
In conclusion, inspiration from the Sarbanes-Oxley Act (SOX) is based on the benefits accruing from its adoption by complying with various sections of the act.
References
Cunningham, Lawrence A. “Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform The.” Conn. L. Rev. 35 (2002): 915.
Lundgren, Andrew A. “Sarbanes-Oxley, Then Disney: The Post-Scandal Corporate-Governance Plot Thickens.” Del. L. Rev. 8 (2006): 195-213.
Panko, Raymond R., and Nicholas Ordway. “Sarbanes-oxley: What about all the spreadsheets?.” arXiv preprint arXiv:0804.0797 (2008): 10-17.
Schwartz, Rachael E. “The Clawback Provision of Sarbanes-Oxley: An Underutilized Incentive to Keep the Corporate House Clean.” The Business Lawyer 64, no.1 (2008): 1-35.
Wagner, Stephen, and Lee Dittmar. “The unexpected benefits of Sarbanes-Oxley.” Harvard business review 84, no. 4 (2006): 133.
Wolkoff, Neal. “Sarbanes-Oxley is a curse for small-cap companies.” Wall Street Journal 15 (2005):1-19.