If you were an investor would you want your money protected? Wicked you be skeptical about investing in companies since the securities fraud scandals that have happened recently? The answer is most likely, “yes”, to a certain degree. With the news about unethical business practices and companies not following regulatory guidelines, it is difficult to ignore the risk that is involved with trusting someone else with your investment.
But there is an answer to help protect companies and hardheaded, and it comes in the form of a regulatory organization that was put in place in 2002. That was put in place as a direct response to the corporate scandals of Enron and other scandals that followed, and was also put in place to help restore confidence in the financial market. SOX-Applies only to US companies on the US exchange, and is an Act put in place in 2002 to mandate all publicly traded corporations to maintain adequate internal control.
SOX basically make sure that all US publicly traded corporation do what is in the best interest to protect the investment of stockholders. SOX-Serbians-solely Act of 2002 is an ACT that was put in place where all publicly traded U. S. Corporations are required to follow certain guidelines and requirements. Basically, these systems were put in place because of securities fraud issues that came to light in the early sass’s, and are put in place to help minimize and eliminate fraud, to ensure accurate record keeping and reporting as well as to protect investors (Kismet, Paul D. 2011-06-28). One key component is a Code of ethics requirement which provides a guideline for internal corporate governance. These standards outline standards for corporate Officers, Directors, employees, and even its internal auditors. Another key component and mandatory requirement of SOX is for the company to hire an outside auditor, and that there be a rotation of auditors within that firm to conduct the audits. Some professionals are stating that is should be necessary to rotate auditing firms rather than auditors within a firm for extra security.
Ken Lay, once CEO of Enron, is known to possibly have the greatest impact on scrutiny and legalization of business ethics. His unethical behaviors over the ten years prior to the lapses of Enron and fraud conviction were a major concern. Lay was convicted in 2001 of conspiracy and securities and wire fraud, as well as making false statements and bank fraud (Farrell, O. 0. , ; Farrell, L. , 2011). Scott D. Sullivan and World Inc. Is a CUFF who will stand trial for his part in defrauding 11 billion dollars from investors through false statements.
Four other former executives pleading guilty for related charges, and their boss was also charged with false information to the SEC. Healthiness Corp… CEO Richard Crush; CEO Jeff Whiten, CUFF John Todd, and Controller Robert Amazons were all involved in the accounting scandal at Gateway Inc (Farrell, O ; Farrell, L Above are Just a tee examples of the importance of having a regulatory system such as SOX put in place. The SEC and GAP are similar regulatory systems that function on different levels and have different authoritative capabilities, but we will only discuss SOX for the sake of this paper.
When the Act was first enacted James Salesman, a resident of the American Enterprise Institute, said that he felt that the Act will have several effects on the industry. He said it would ease compliance cost and other expenses, Deter innovation and risk taking, increase lawsuits, and distract Coo’s and other executives from important tasks (Allendale J. T. 10 years later there is still criticism as to the success of SOX. Some say that (2002). SOX has not done enough to change the auditing and accounting industry, and has not addressed the conflict between serving the client and serving the greater good.
Others say that SOX has not help increase competition in the industry, and although auditors have become more independent of their clients, and audit partner rotate off accounts after 5 years, it allowed auditing firm itself to serve the same client indefinitely (Allendale J. T. (2002). According to oppositions, another blunder and loophole in the law is the law that was enacted under President Barrack Beam’s watch call JOBS, or Jumpstarted Our Business Startup.
While it is great for small, new companies to raise capital and go public it also lets these businesses ignore the SOX Act, which includes its checks and internal controls for a few years (Draught K. And Butt D. (2012). Yet, other criticism comes in that foreign companies operating in the U. S. Are not under the SOX laws and have their own regulatory agencies, but still benefit from the SOX laws. The SEC has delayed foreign companies or smaller businesses with a smaller capital of $75 million dollars to comply with Section 404 of the SOX act because the SEC is aware of the added burden to smaller businesses (Lisa, M.
P. , Sullivan, S. ,A. , ; Shannon, J. H. , 2007). And yet, there is hypothesis of companies that may intentionally be remaining below the threshold in order to remain exempt to SOX regulations. It has been documented that many of Hess firms are intentionally staying small by undertaking less investment, making more cash payout to shareholders, reporting lower earnings, take actions toward some corporate policies which allows the company to stay small, and other things that help the firms stay within the threshold and exempt from SOX regulations, and to avoid the economic consequences of being a larger firm.
Many changes have been made due to the SOX Act. Some of the changes that will be made are the increased workload of the Directors, which in essence, reduces the supply. There is also an increase demand that mandates organizations have more outside Directors. Board meetings have increased since the changes of SOX, and Director and Officer insurance premiums have doubled since the implementation of the SOX Act.
Another increase in cost is that Directors Post SOX will more likely to be lawyers/consultants, financial experts, and retired executives, and less likely to be current executives. Do to these changes there have been significant increases in Director pay and overall costs which will be felt more in smaller firms (Link,J. S. , Netter,J. M. , ; Yang, T. Auditing tees will most likely increase because to the loss to income trot higher-margin consulting work. Higher consulting cost will be seen, not only for those companies involved in the fraud, but for everyone.
In March of 2004, CUFF. Com reported a 23% fee increase in Firms in North Carolina and South Carolina. Another Financial Executive International survey reported compliance cost in the first year ranging anywhere from $2 million to $5 million. Another firm in 2004 estimated their cost skyrocketing up to $1 5 million, with larger companies seeing a significant mount of hours being diverted from other types of consulting work to compliance work. Additionally, Foreign companies that listed their securities in the U.
S. Found that auditing fees increased 65% for the initial filers in the first year, and by an addition . 9% in the second year. These increases were representative in a . 5% decrease in earnings for these companies (Bohemianism, S. , Gunning, R. , ; Schroeder, R. (2009). Due to the increase in Auditing fees some companies may find it difficult or unaffordable to secure audit service. Because of the fees and regulation associated tit SOX many companies are threatening and choosing to not go public.
Public companies are opting to go private, and as with Propose, they decided to not list share in the U. S. Market. Has the Serbians-Solely Act achieved its goal so far? One way in which the Serbians-Solely Act has made progress towards its goal is its initial steps to enact the SOX law in 2002 as a result of reports of financial fraud, lapses in audit and corporate governance responsibilities, and intentional manipulation of accounting rules.
One goal of the SOX Act is to restore confidence in investors as well as assure integrity in the market. While the SOX laws have affected larger companies and its investors, and has made significant improvement in this respect, it has failed to do so in smaller businesses and have not assured this confidence and integrity as much in the smaller business sector. The Serbians- Solely Act has also mandated that all publicly traded companies hire independent auditing firms as part of the SOX regulations and compliance.
This is a great approach for maintaining audit integrity and an unbiased professional approach for auditing, but not so much because companies are able to hire the same firm indefinitely with the only requirement that partners within the firm be rotated every 5 years. Another step in achieving the goals of SOX is the strengthening of commission to be able to restore confidence in investors by having the ability to enforce powerful sanctions against wrongdoers as well as compensate those investors who have been injured as a result of the wrongdoing.
And while this plan is not full proof either it is a step in the right direction. Part of the Act gives authority to the commission to enforce the “Fair Funds” provision, which is basically giving the commission authority o collect and reimburse or compensate injured investors. By 2005, the commission authorized “Fair funds” in over 100 cases, which totaled $5. 2 billion dollars for anticipated distribution to investors who have been harmed as a result of fraud. Another important objective of the SOX Act is to improve responsibilities beginning at the “top” of public companies.
This objective dates back to President Bush’s ten-point plan in 2002. He basically stated that the tone of the company begins at the “top”, by top management. Some of the things addressed in respect to this theme are that ports must be certified by ‘San Coffs This basically meaner that, although Coo’s and Coffs have a responsibility for company disclosures, they also have a greater responsibility to assure that these reports be complete and accurate. That is not all.
SOX went further and mandated that all publicly traded companies disclose off-balanced sheet transactions and enhance disclosure of material current event affecting companies, among other mandates, but the most significant is SOX section 404 which is an assessment of the internal controls and its effectiveness over uncial reporting and internal audits; this affected over 95% of all publicly traded companies (Chairman Donaldson Is the Serbians-Solely Act of 2002 perfect? Of course not. While SOX, W. H. (2005). The SEC, the GAP, and other regulatory systems are put in place, these agencies cannot micro-manage every aspect of an organization.
Section 404 of the Serbians- Solely Act says, the top officials need to be responsible for the accuracy and integrity of an organization, but it is ultimately up to each individual. Such as the scandals discussed previously, Ken Lay, once CEO of Enron; Scott D. Sullivan and World Inc; CEO Richard Crush; CEO Jeff Whiten, CUFF John Todd, and Controller Robert Amazons; they obvious found the benefits greater than the risks, and regardless of any obvious consequences, are responsible for committing some of the most historic and notable white collar crimes in business to date.
On a personal note, SOX only works as much as it holds Coo’s and Coffs responsible. In the case I’m about to mention it is the Mayor of Harrisburg, PA and other responsible parties. The SEC investigated and found misleading statements made in the city budget report. Harrisburg failed to comply with requirements to provide certain financial information. Harrisburg was in non-compliance from 2009-2011 and investors had to seek out other forms of financial statements to obtain current information about the city’s finances (Washington, D.
C. , 2013). The consequences? Nothing. The responsible parties were able to get away without consequences by neither admitting nor denying the allegations. The SEC basically slapped these Harrisburg officials on the wrist and rewarded them for their cooperation in the investigation. There are no statements of the commission authorizing reimbursements to the victims of the fraud, and there has also been no mention of criminal or civil filings against the perpetrators in the case. 260 million dollars in debt later, the citizens and tax payer of the city of Harrisburg, PA are left with a debt that city officials are responsible for. SOX, the SEC, and other regulatory agencies are far from reaching their goals, especially if these agencies continue to approach cases such as Harrisburg in the matter that they did. That leaves to question, “who is monitoring hat the SOX Act is implemented unbiased, and assuring that the regulatory agencies, too, are following the very standards that it implements on publicly traded companies”