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Sarbanes-Oxley Act and Corporate Governance Essay

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Updated: May 25th, 2021

The Sarbanes-Oxley Act (SOX), implemented in 2002, aims at decreasing fraud within U.S. companies and has had the most varied effects on their operation. Both positive and negative influences on business have surfaced from an increase in company spending, necessary to comply with the rules and regulations imposed by the act, to an increase in shareholders’ trust. Thus, components of the Sarbanes-Oxley act affect corporate governance and the modes of regulation of businesses and companies through strict supervision.

Elements of the Sarbanes-Oxley Act

Before dissecting the components of SOX, it may be possible to highlight the impact the act has had some years after its implementation in 2002. In short, the goals and effects of the act may be summarized as “[establishing] more stringent standards for internal controls, auditing, disclosures, and management conduct and accountability” (Hostak, Lys, Yang, & Carr, 2013, p. 522). For corporations, this would mean a need for necessary changes within their internal structure to comply with the required standards.

The decentralization of companies from being independently responsible for their own profits, taxes, and finances was the goal of SOX. Thus, this allows defining the main elements as auditor impartiality, corporate responsibility, penalty and accountability for crime, as well as financial disclosure through, at least, the operation of a Public Company Accounting Oversight Board (Tricker, 2015). These kinds of changes are aimed at heightened business transparency and, thus, affect the amount of confidence a company will be able to garner due to the scrutiny applied to its corporate board (Hostak et al., 2013).

It may be an understatement to say that SOX has affected their format when it has not only increased the number of “outsiders” but also aided corporate board gender variability (Zhang, Zhu, & Ding, 2013, p. 382). The operation of an autonomously functioning and disinterested body responsible for finances allows the achievement of SOX goals highlighted in the paragraph above.

Aspects of Corporate Governance within the Sarbanes-Oxley Act

The act has attempted a change over the way corporations are governed, creating internal change through increased external surveillance. At the very core, corporate governance can be defined as “the way power is exercised over corporate entities,” and thus, one of the goals of SOX would be to create an effective leverage method (Tricker, 2015, p. 4). Therefore, within corporate governance boards, and likewise with those concerned with audit and compensation, the most important remains the factor of neutrality (Zhang et al., 2013). A reimagining of the elements of corporate governance as ideally nonaligned with possible fraudulent interests, hence, becomes an essential step in achieving SOX goals.

A Change in the Mode of Regulation

The impact these changes have had on modes of regulation within and without companies may be identified as enormous, as may be seen from the examples presented above, especially in the modification of board composition. As stated by Zhang et al. (2013), the implementation of SOX has seen to the fact that “both the membership and certain functions of corporate boards are explicitly regulated” (p. 382). Thus, SOX had introduced the possibility of new corporate regulation through multiple new influential tactics as well as the installation of answerability.

Conclusion

The Sarbanes-Oxley Act, having had an appropriate amount of time to take effect, as well as garner attention of analysts and researchers, displays a change in the modes of control over corporations. Affecting both board configuration and creating pathways for company liability in the event of non-compliance has changed the atmosphere of U.S. business. Ultimately, the act has touched upon central elements of corporate operation and has amassed a mélange of effects, influencing big and small companies.

References

Hostak, P., Lys, T., Yang, Y., & Carr, E. (2013). An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of U.S. capital markets for foreign firms. Review of Accounting Studies, 18, 522-559. Web.

Tricker, R. (2015). Corporate governance: Principles, policies, and practices (3rd ed.). Oxford, U.K.: Oxford University Press.

Zhang, J., Zhu, H., & Ding, H. (2013). Board composition and corporate social responsibility: An empirical investigation in the post Sarbanes-Oxley era. Journal of Business Ethics, 114, 381-392. Web.

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IvyPanda. 2021. "Sarbanes-Oxley Act and Corporate Governance." May 25, 2021. https://ivypanda.com/essays/sarbanes-oxley-act-and-corporate-governance/.

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IvyPanda. (2021) 'Sarbanes-Oxley Act and Corporate Governance'. 25 May.

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