Securities and Exchange Commission (SEC) is a federal commission that was established by the Congress of the United States. The significance of SEC is to guard investors and to maintain an organized and fair functioning of security markets (Kaczmarek, 2002). SEC also serves to facilitate the formation of capital. Notably, SEC ensures that there is full public disclosure. As such, it protects investors from fraudulent or rather manipulative schemes that prevail in the market. It also monitors other activities in the United States such as a corporate takeover. In that respect, most domestic commerce security issues ought to be registered with SEC whether it is email or internet oriented.
Of essence, SEC mainly supervises businesses and individuals in markets that are security oriented. This may include brokerage companies, securities exchange, investment funds, dealers as well as investment advisors (Kaczmarek, 2002). In order for such purpose to be realized, SEC has established various rules and regulations. Such rules play an important part during the disclosure and sharing of market-oriented information. It also plays a role when setting up fair deals and protecting individuals from fraudulent schemes in the market. As such, investors are provided with a chance to access registered financial statements, timely reports, and security forms.
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Nonetheless, despite the efforts by SEC to reduce corporate scandals in public companies, the United States continued to experience increased instances of fraud in these enterprises. In fact, between 2000 and 2002, there were increased cases of public companies defrauding investors (Jahmani & Dowling, 2011). This led to the formulation of the Sarbanes-Oxley Act in 2002. Apparently, this was done purposely to restore the confidence of investors in the market. It also aimed at reducing or rather addressing the issues that made investors prone to fraudulent schemes in the market.
The Sarbanes-Oxley Act of 2002 significantly influenced corporate governance in the U.S. According to this Act, public companies were required to do a couple of things so as to minimize instances of market manipulation (Ritternberg & Miller, 2005). Some of the things that corporate companies are supposed to do under this Act included strengthening audit committees and conducting regular internal control tests. Besides, public companies are expected to set personal liability of managers and finance officers in order to ensure that the financial statements are accurate as well as strengthening disclosure. For this purpose to be realized, Sarbanes-Oxley Act established strict penalties that are applicable where security fraud has been identified. Typically, this act has changed the manner in which public companies that are accounting oriented conduct their businesses.
On the other hand, the Sarbanes-Oxley Act has a direct effect on corporate governance. For instance, Sarbanes-Oxley Act strengthens the audit committees of public companies (Jahmani & Dowling, 2011). Notably, through this act, the audit committees get the liberty to examine or rather assess the accounting decision of top management. In that respect, the decisions made by the audit committee ought to be independent of the top management. In addition, the act requires the board to have new obligations like approving vast audit and non-audit services. Other new roles that Sarbanes-Oxley Act provides the auditing committee is choosing and supervise external editors. Finally, they are required to address complaints that are raised regarding the accounting practices of the management.
According to Section 404 of the Sarbanes-Oxley Act, public organizations are mandated to conduct an elaborate internal control test (Ritternberg & Miller, 2005). After performing such tests, the act requires them to document the finding in the annual audit report of the company. Apparently, this process is expensive for most businesses. Notably, testing and publishing manual as well as automating the controls in the financial reports needs significant amount efforts and time (Jahmani & Dowling, 2011). It also requires the involvement of both the external and IT experts. Companies that feel the wrath of this act are those that depend on manual controls. Nevertheless, the Sarbanes-Oxley Act requires companies to ensure that their financial reports are not only centralized but also automated. Of essence, financial reporting has to be more efficient.
The implementation of the Sarbanes-Oxley Act has seen a significant change in the responsibility of the management during financial reporting (Lenn, 2013). This act expects the top managers to attest that the provided financial information is accurate to the best of their knowledge. In that regards, if the managers provide a false certification, they will be imprisoned for more than ten years. In some instances, a company may be forced to give an accounting restatement following top management misconduct. If that is the case, Sarbanes-Oxley Act requires the manager to give up their profits generated from selling the stock of the company. Furthermore, a director who has been convicted following a violation of security law will not be allowed to serve in the same capacity in a public company.
Notably, Sarbanes-Oxley Act has played an important role when it comes to strengthening the disclosure requirement (Lenn, 2013). Under this Act, public companies are supposed to disclose any information like special purpose and operating leases entities. Besides, public companies are expected to provide information relating to extra Pro-forma information as well. Of essence, the company ought to disclose how such statements are likely to appear in the GAAP. Furthermore, the insiders are expected to report their stock transactions with SEC within after two days.
In conclusion, the Sarbanes-Oxley has been able to strengthen the enforcement of securities fraud by imposing strict punishment for individuals who get involved in securities fraud. Notably, this act has increased the jail term for individuals who commit securities fraud to 25 years. In addition, the fines which public companies that get involved in such have also been increased significantly. As such, Sarbanes-Oxley Act has significantly influenced corporate governance in public companies by ensuring that the e nforcement of securities fraud is strengthened and accounting reforms are realized.
References
Jahmani, Y., & Dowling, W. A. (2011). The Impact Of Sarbanes-Oxley Act. Journal of Business & Economics Research (JBER) , 6 (10):57-66
Kaczmarek, D. W. (2002). The SEC's Role in the Global Era: How the SEC Will Protect US Investors in Foreign Markets. Indiana Journal of Global Legal Studies , 529-553.
Lenn, L. E. (2013). Sarbanes-Oxley Act 2002 (SOX)-10 years later. Journal of Legal Issues and Cases in Business , 2 (1): 1-14.
Rittenberg, L. E., & Miller, P. K. (2005). Sarbanes-Oxley Section 404 work: looking at the benefits. The IIA Research Foundation .
