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The Sarbanes-Oxley Act which is aimed at restoring confidence of investors and enhancing reliability of financial reporting was enacted in 2002 (Abdullah, 2011). The act became a response to the number of accounting scandals which led to the lack of investor’s confidence.
Notably, the act has had quite a significant impact on the US market. It is necessary to note that there are many positive effects, but there are quite many negative outcomes of the act. A lot of critics claim that unless the US government changes the act, it can jeopardize the US economy.
Positive Effects of the Act
Admittedly, the Sarbanes-Oxley Act, which is often referred to as SOX, has had some positive effects. Thus, Gilbride and Benjamin (2012) note that companies have become more responsible. Audit and accounting companies are encouraged to provide reliable information to investors.
Apart from this, many companies have developed ‘up-graded’ codes of conduct which fit the act. Besides, Gilbride and Benjamin (2012) claim that the act protects whistle blowers. Admittedly, this leads to transparency between employees and top management, as well as companies and investors.
Of course, increased investors’ confidence can be regarded as a success of the act as it was one of the major objectives of this document enactment. The act ensures certain transparency which can prevent frauds. In fact, the act resulted in disclosure of a fraud in 2009. However, there are still quite many negative outcomes.
Negative Effects of the Act
It is necessary to note that many researchers agree that the act should be amended as though there are some positive outcomes the act contains too many faults which may lead to negative effects on the US economy. One of the major arguments of the act’s critics is that companies have to increase expenditures to fit the act.
Thus, Addington (2011) states that companies have to spend more money to provide the necessary data to ensure they can get reliable reports. Abdullah et al. (2011) also note that audit and accounting companies require increased funds as they want to make sure they can avoid any risks and provide reliable reports. Again, this adds to the costs spent on audit.
Abdullah et al. (2011) as well as Addington (2011) stress that this makes many small companies vanish. The researchers also add that the funds spent to comply with the act should be spent to create new jobs. Admittedly, now one of the major problems of the USA is unemployment. Therefore, the act contributes to the aggravation of the problems associated with unemployment.
To sum up, it is possible to state that the Sarbanes-Oxley act has had positive as well as negative effects on the US economy. On the one hand, audit and accounting companies have started providing more accurate reports which raised confidence among investors. Undoubtedly, this is a positive change.
On the other hand, companies have to increase their expenditures to comply with the act. This negatively affects the US economy as many companies cannot compete in such an environment. Secondly, the companies do not create new jobs and this aggravates unemployment. Therefore, many researchers admit that the act can positively affect the US economy if certain amendments are made. It is necessary to reconsider some sections of the act to help companies regain competitiveness on the global market as well as the US market.
Abdullah, K.A., Al-Jafari, M.K. & Kourabi, F. (2011). The effect of Sarbanes-Oxley Act (SOX) on corporate value and performance. European Journal of Economics, Finance and Administrative Sciences, 33(1), 42-55.
Addington, D.S. (2011). Congress should repeal or fix section 404 of the Sarbanes-Oxley Act to help create jobs. WebMemo, 3380, 1-5.
Gilbride, J. & Benjamin, R. (2012, Spring). Blowing the whistle on retaliation. In-House Defense Quarterly, 32-35.