Analyzing the Impact of the Sarbanes-Oxley Act When the Sarbanes-Oxley Act passe

Question

Analyzing the Impact of the Sarbanes-Oxley Act

When the Sarbanes-Oxley Act passed, it was in the wake of various corporate scandals that hit the business world and challenged the fiscal accountability of public corporations. The anticipated impacts and the complexity of the requirements of the Sarbanes-Oxley Act were unknown at that time. How successful do you think Sarbanes-Oxley has been in meeting its objectives? Where do you think it has fallen short? Has there been any unintended impact from this legislation? Please identify and explain specific examples.

Resources:

Chapters 19, 20, & 21 from the following book:

http://wafaa-sherif.com/new/ar/wp-content/uploads/2012/11/Enterprise%20Risk%20Management.pdf

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https://class.waldenu.edu/bbcswebdav/institution/USW1/201620_04/MS_ACCT/ACCT_6600_ACMG_6600_MMBA_6784/Week%207/Resources/Resources/embedded/el-masryreck2008.pdf

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http://www.coso.org

Explanation / Answer

Enron Scandal:

Enron was an american energy company, mainly engaged in production of energy, gas and pulp and paper.

7th fortunes 100 best american companies of U.S.

it claimed revenue of 111 Billion.

Assets and profits inflated.

Profits and revenue genertaed due to transaction with related parties.

Understatement of liabilty.

insider trading.

Price of share of Enron dropped from $ 90 to $ .50 . Bankrupt in late 2001.

Arthur anderson facing many Civil and Criminal cases against them.

Effect:

The Sarbanes-Oxley Act of 2002, also known as the Public company accounting reform and investor protection act of 2002 and commonly called SOX or Sarbox is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron.

The act establishes a new quasi-public authority, the public company Accounting Oversight board for overseeing, regulating,inspecting and disciplining accounting firm in their roles as auditors of public companies.

The act covers issues such as auditor independence, corporate governance and enhanced financial disclosure.

Unintended Implication:

SOX increased directors' workload and risk (reducing the supply), and increased demand by mandating that firms have more outside directors. We find both broad-based changes and cross-sectional changes (by firm size). Board committees meet more often post-SOX and Director and Officer (D&O) insurance premiums have doubled. Directors post-SOX are more likely to be lawyers/consultants, financial experts, and retired executives, and less likely to be current executives. Post-SOX boards are larger and more independent. Finally, we find significant increases in director pay and overall director costs, particularly among smaller firms.

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