Introduction
The Sarbanes-Oxley Act of 2002 (SOX) was passed by Congress after the devastating effects of the collapse of corporations such as Enron and WorldCom on the economy of the United States (Kathleen, 2010). The main objective of the legislation was to improve the performance of the stock market by regaining investor confidence and trust. After the widespread collapse of large corporations, investors renounced the financial market because they were afraid of further losses. The Act was also meant to act as a tool for detecting cases of fraud in financial statements of companies and businesses, and as a guide for improved financial reporting. The Act has been effective because it has fostered a culture of transparency and accountability in organizations’ execution of financial operations (Kathleen, 2010).
Effectiveness of the act
First, the Act has succeeded in restoring confidence in the accounting profession that had been lost after the collapse of many corporations in 2000 and 2001. Implementation of the Act led to the adoption of rules that promoted the independence of auditors. The rules have helped to eradicate the manipulation of company reports by auditors. Studies have revealed that the Act has eradicated collusions between auditors and companies (Donaldson, 2005).
Companies no longer influence auditors as they used to do before the enactment of the Act. Auditors are strict and adhere to provisions of the Act without compromise. Transparency has been further augmented by acknowledgment of the Financial Accounting Standards Board as a constituent of the body responsible for setting accounting and auditing standards.
Secondly, the Act has contributed to the restoration of investor confidence in the capital markets. This has been achieved because the Act has facilitated the enforcement of laws that control the trading of federal securities. Certain rules that were added to the Act discourage financial fraud and facilitate compensation of investors who face losses because of fraud activities by companies (Donaldson, 2005). The Act has enabled the Commission to conduct fair investigations on cases of fraud and award appropriate punishments. This has reduced cases of financial transgressions in dealing with federal securities and investors’ portfolios.
The commission can compensate investors who suffer losses due to negligence or fraud activities (Donaldson, 2005). Investor compensation has been facilitated by the fair funds provision contained in the Act. The Act is described as effective because it has overcome several challenges such as discovery and return of funds to victims of fraud (Kathleen, 2010).
Thirdly, the Act has contributed to the improvement of executive responsibility in the management of companies (Vay, 2006). According to the Act, the CEO and CFO should certify company reports. In addition, it has illegalized insider trading during bleak financial moments of pension funds and improved timely filing of transactions after execution of a trade. For example, in 2004, many companies complied with the Act’s directive to certify company financial reports. The directive has reduced cases of fraud and financial mischief. In addition, companies present more accurate and reliable financial reports to investors.
This has encouraged investors to invest again in the stock market because of reduced fear of financial collapse due to improved accountability and transparency by companies’ executives. Section 302 of the Act requires CEOs and CFOs to be responsible for the accuracy of financial statements released to investors. Before the enactment of SOX, there was a lack of accountability and transparency because CEOs and CFOs were not bound by any regulation to present correct financial reports.
Section 201 has eradicated the possibility of companies liaising with auditors in efforts to manipulate financial reports (Vay, 2006). Before the advent of SOX, companies entered into agreements with auditors to manipulate reports and financial statements to their advantage to conceal cases of fraud. Generally, the Act has improved accountability, speeded up reporting, and improved the reliability and accuracy of auditing. This has restored confidence in the U.S financial markets (Vay, 2006).
Despite improvements, the Act has not done enough to discourage the concealment of fraud cases in financial statements (Vay, 2006). However, it has helped to unearth such fraud cases. For example, in 2009, the Securities and Exchange Commission (SEC) discovered discrepancies in the statements of the Value Line Fund. It involved more than $24 million. The Act helped to solve the case because affected investors were compensated with more than $34 million, and the company was ordered to pay damages under the provisions of the Act (Kathleen, 2010). Employees and senior management of companies have become more transparent and responsible in financial reporting.
Conclusion
The Sarbanes Act of 2002 was passed by Congress in 2002 after the devastating effects of the financial collapse of corporations such as Enron and WorldCom that had a great impact on the American economy. The main objective of the legislation was to improve the performance of the stock market by regaining investor confidence. Since the enactment of the Act, the financial markets of the U.S have regained investor confidence because of improved accountability and transparency in financial reporting. In addition, there has been improved auditing of companies’ reports, which has reduced cases of fraud and improved financial reporting.
References
Donaldson, W. (2005). Testimony Concerning the Impact of the Sarbanes-Oxley Act. Web.
Kathleen, S. (2010). The Impact of the Sarbanes-Oxley Act of 2002 on the U.S Financial Markets. New York: ProQuest.
Vay, D. (2006). The Effectiveness of the Sarbanes-Oxley Act of 2002 in Preventing and Detecting Fraud in Financial Statements. New York: Universal-Publishers.