The Sarbanes Oxley Act and Its Impacts on Corporate Finance and Corporate Governance Behavior
Swiss Management Center University (SMC)
July 15, 2012
In the wake of a series of corporate and accounting scandals involving major US corporations such as Enron, Tyco, WorldCom, Adelphia, and Peregrine Systems, the US government enacted the Sarbanes-Oxley Act (2002) otherwise known as (SOX) to improve corporate governance practices. Significantly, foreign registrants traded on US stock exchanges are also required to comply with SOX. In this report, a brief comprehensive review of studies and reports conducted after the enactment of the Act has been undertaken. From the review, there are mixed results with some painting a positive image while others have a negative image. Some of the positive add-on effects include restoration of the integrity of financial statements by removing a very large conflict of interest that existed in the 1990s; ending self-regulation of the public accounting industry; removing the relationships between auditors and the audited firm’s CEO and CFO and replacing them with the audit committee; improved investor confidence and more accurate, reliable financial statements, prohibiting auditors from having lucrative consulting agreements with the firms they audit. Others include requirements that partners of an auditing firm only supervise the same client for five years at a time; and addressing the agency problem which before the enactment of the law was a potential conflict of interest issue between a firm and its executives. The negative effects include reduction in stock value of firms, increase in audit fees; inflexible rules, coupled with managerial fear from greater opportunities for prosecution and stiffer penalties negatively affecting firms’ profitability; high monitoring costs and fewer benefits from outside monitoring. These mixed results could partly be attributed to the time duration between the enactment of the Act and the time span within which the studies were conducted. Thus it is necessary that an elaborate study, if possible, using pooled data, is undertaken to clearly examine the impact of the SOX Act on corporate finance as well as corporate performance in the USA while incorporating the companies that were initially embroiled in massive fraud.
Number of Pages in PDF File: 42
Keywords: SOX, Corporate, Scandal, Compliance, Performance
JEL Classification: M14working papers series
Date posted: July 17, 2012 ; Last revised: August 13, 2012
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