Avoiding Future Frauds with the Sarbanes-Oxley Act Essay Example for Free

Avoiding Future Frauds with the Sarbanes-Oxley forge EssayIt is clear that the establishment of the Sarbanes-Oxley (SOX) make up in 2002 was ad hoc to reducing future financial fraud and imposing criminal penalties for in the public eye(predicate)ly traded companies. What is not clear is whether or not the act has proved to be successful in its implementation and governance. The establishment of the act and later(prenominal) amendments are intended to protect the public from fraud in the financial accounting of publically traded corporations. In 2002, on that point were perspicacitys both for and against the effectiveness of SOX. More than a decade later, there are still opinions on both sides of the debate. Criticism of the Sarbanes-Oxley ActThe effectiveness of the Sarbanes-Oxley act has been highly criticized since its inception. One of the major contentions is that the Sarbanes-Oxley act has no provisions to differentiate the requirements for low publicly traded m elodyes from large conglomerates (that lead and often monopolize the marketplace). Publicly traded companies that are small in size may get hold the approach of compliance prohibitive to the future of their business (Coustan, 2004). Critics of SOX believe that this unnecessarily reduces the number of players in a competitory marketplace. The cost of compliance can be excessive for some smaller companies. Auditing expenses contract companies to seek private investment and become privately possess (San Antonio Express-News, 2007). Ten years ago, critics expressed fears that small, publicly listed companies might not meet internal control inform requirements without substantial additional expense some may cede to delist be exertion of it.It could mean only larger companies forget go public (Coustan, 2004, p. 1). In recent years, this debate continues. Critics still express concerns that Sarbanes-Oxley is overreaching and has placed redundantrestrictions on corporations that ha ve and will continue to unduly inhibit corporate performance until they are upstage (Brite, 2013). Another major contention of critics is that the be of compliance for outweigh the benefits in an international marketplace. Those against SOX feel that the costs outweigh the benefits and speak out in public forums stating that the Sarbanes-Oxley has burdened the US financial market with dear(p) rules and regulations that have trim down international competitiveness (debate.org, 2014). There are those that openly share the opinion that the implementations of restrictive overkill through the 2002 Sarbanes-Oxley act wrongfully crystallize the innocent suffer for the guilty (Gil more(prenominal), 2013).The reporting requirements of SOX are unique(predicate) to businesses in the United States. Unlike American business, international business does not have the same requirements. regulatory compliance opposes economic costs on organizations and can affect their competitive advantage ( Srinivasan, 2014, p. 44). Increasing the cost for American business decreases competitive advantage in the worldwide marketplace. In addition to cost and competitive advantage, the structure of the bill has withal been called into question. The Court of Appeals recently tack together difficulty with the wording of the amended 18 USC, citing that paragraph (b) of the statute includes the word knowingly while paragraph (c) does not (Bishop, 2013).The opinions of the Court of Appeals lends to the public opinion expressed in published CPA perspectives that SOX was a hastily assembled bill (Moran, 2013). Involved and cumbersome requirements cause confusion and frustration for companies attempting to comply with the Sarbanes-Oxley act even more than a decade after its implementation. Companies and equitymakers uniform have had difficulty over the years with the interpretation of and compliance with the act. SOX brought about many changes to the way public companies had to operate, and there was some question as to how these would stand up over time (Moran, 2013).Positive Aspects of the Sarbanes-Oxley ActDespite complaints by critics, there are positive aspects of the Sarbanes-Oxley act that have withstood the test of time. Initial reactions have softened after smaller businesses were granted some relief in later amendments of the act. Larger businesses found that compliance with the actincreased investor confidence and contributions. In addition, the resultant increase in financial hydrofoil has improved business relationships on many levels. First and foremost, there are many of the opinion that the transition of the Sarbanes-Oxley act increased investor confidence and protection in the marketplace. Does Sarbanes-Oxley prevent all bad actors from defrauding investors? No law could accomplish that. But it can and has deterred such activity (Gillian, 2012, p. 1). Those in support of the Sarbanes-Oxley act agree that there is a positive side for investors and the businesses in which they invest. A 2005 survey by the Financial Executives Research grounding found that 83 percent of large company CFOs agreed that SOX had increased investor confidence, with 33 percent agreeing that it had reduced fraud (Hanna, 2014, p. 2).With an increase in confidence and a perceived reduction of fraud, investors could more confidently make intelligent business decisions on the purchase and sale of publicly traded companies. Those on the positive side of the SOX act believe that the effects on small business have softened. Studies show that as companies become more accustomed to the costs of compliance, the expense decreases (San Antonio Express-News, 2007). In addition, the effects on smaller companies were ultimately deferred. Audit standards also were modified in 2007, a change that reportedly reduced costs for many firms by 25 percent or more per year (Hanna, 2014, p. 1). Although the costs of compliance decrease retained earnings, investors are more conf ident in the reliability of company reports (Gillian, 2012).The cost of being a publicly traded company did cause some firms to go private, but research shows these were primarily organizations that were smaller, less liquid, and more fraud-prone (Hanna, 2014, p. 1). These modifications of the act allowed more small businesses to remain competitive in the marketplace. Business relationships have also improved with increased transparency. The reduction of selective training asymmetry is a direct benefit to both the company and the investors. Information asymmetry is a stance in which one party in a transaction has more or superior information compared to another (Brite, 2013, p. 1). Periodic testing of internal controls required by SOX 404, increases transparency among internal and external stakeholders of the business. The American comprise of CPAs states on their website that section 404B has led to improve financial reporting and greatertransparency (American Institute of CPAs , 2006 2014).Conclusion and OpinionTo evaluate the effectiveness of SOX in preventing future frauds, one must take into favor the many different situations in which the legislation is applicable. Enactment of the Sarbanes-Oxley act increases corporate responsibility and sets restrictions on attendant services. This certainly reduces the potential for fraud however it does not eliminate it. From a business perspective, compliance is beneficial. The costs of implementing the requirements may be high however the benefit of increased investor confidence in a publicly traded environment is higher. There are going to be situations in which fraud is inevitable. Fraudulent wrongdoers and companies will find loopholes and the recent Court of Appeals case is evidence of that fact. As with any law, this regulation will reduce the absolute frequency of, but not prevent, purposeful future criminal activity.ReferencesAmerican Institute of CPAs. (2006 2014). Section 404B of Sarbanes-Oxley Act of 2002. Retrieved from AICPA American Institute of CPAs http//www.aicpa.org/advocacy/issues/pages/section404bofSOX.aspx Bishop, K. (2013, June six). Grand Theft Auto Meets the Sarbanes-Oxley Act. Retrieved from California Corporate and Securities Law http//calcorporatelaw.com/2013/06/grand-theft-auto-meets-the-sarbanes-oxley-act/ Brite, C. (2013, June 30). Is Sarbanes-Oxley a impuissance Law? Retrieved from University Of Chicago Undergraduate Law Review http//uculr.com/articles/2013/6/30/is-sarbanes-oxley-a-failing-law Coustan, H. L. (2004, February). Sarbanes-Oxley What It Means to the Marketplace. Retrieved from Journal of method of accounting http//www.journalofaccountancy.com/Issues/2004/Feb/SarbaneSOXleyWhatItMeansToTheMarketplace.htm debate.org. (2014). Do you believe the Sarbanes-Oxley Act has failed? Retrieved from debate.org http//www.debate.org/opinions/do-you-believe-the-sarbanes-oxley-act-has-failed Gillian, K. (2012, July 24). It Enhanced Investor Protection. Retriev ed from nytimes.com http//www.nytimes.com/roomfordebate/2012/07/24/has-sarbanes-oxley-failed/sar