Introduction
The 20 th century saw the continued rise in the power, prestige and wealth of corporation in America and around the world. With the rise came an increase in the impact of corporations on the lives of citizens including investors and customers of the corporations. However, towards the end of the 20 th century and in the advent of the 21 st century, there were several massive scandals involving corporations. These scandals shed a light on flaws in the oversight of corporations and revealed the potential impact in corporate failure (Pozner, Mohliver & Moore, 2018). To mitigate the potential for such damage, the US Congress enacted the legislation popularly referred to as the Sarbanes-Oxley Act. The act had major ramifications on the management of corporations and the auditing thereof respectively and contemporaneously.
Sarbanes-Oxley Act on internal controls: Management V. Accountants
Investigations into the scandals that led to the Sarbanes-Oxley Act revealed failures on the parts of both management and accounts leading to prohibitory provisions on both. With regard to accountants, the provisions sought to limit conflicts of interest. This limitation exponentially reduced the revenue streams of auditing firms, as they could not provide overlapping services to companies. Further, the Act also sought to make accounts accountable to a third party on the reports they made with regard to companies (Pozner, Mohliver & Moore, 2018). This second provision ensured the accuracy of audits due to the resultant oversight.
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With regard to management, the Act ensured that CEOs of companies had to sign tax returns, hence introducing a form of personal responsibility. The Act then proceeded to increase punitive measures that could be visited upon corporate managers in the case of inordinate mismanagement (Basile, Handy & Fret, 2015). The act also provided for the regulation of executive remuneration for top management, more so in terms of stock options. Based on the above, the impact on management was greater on management than on the accountants. Indeed, the impact on the accounts enabled them to shed more light on the excesses of management who would then face the steeper penalties available under the Act.
Impact on Corporations
The Sarbanes-Oxley Act resulted in the better and more competent management of corporations. Due to the threat of incarceration and other punitive measures, incompetent individuals kept off management positions in companies. Further, due to the issue of personal responsibilities, management practices improved leading to better running of companies (Basile, Handy & Fret, 2015).
Impact on Accounting Firms
The Act led to better regulation of accounting firms in general and the elimination of conflicts of interest between companies and their external auditors. Further, accountants had to choose the kind of relationship they could have with companies as partnerships eliminated the accountants from playing the role of auditors. External audits thus became more accurate due to the regulatory provisions of the act (Basile, Handy & Fret, 2015).
Impact on Investors
Among the core obligations of the Sarbanes-Oxley Act was to increase investor confidence, which had eroded due to corporate scandals. The regulatory provisions of the act meant that investors could trust audit reports and tax returns of companies (Basile, Handy & Fret, 2015). The veracity of such reports rejuvenated investor confidence leading to a resurgence of investment in America. The act also reduced potential losses for investors who would erstwhile make wrong investment decisions based on false corporate reports.
Conclusion
America embraces a free-market capitalist economy, which limits government interference in the private sector. However, the inability of the private sector to regulate itself effectively led to the enactment of the Sarbanes-Oxley Act. The said Act regulated the conduct of corporate managers and accountants to enable them to present an accurate picture of companies to the public generally and more specifically to investors. A careful evaluation of the regulatory provisions of the act show reflects acts and omissions that ethics alone should have instigated in managers and accountants. The Act was successful in attaining its primary role, which was rejuvenating investor confidence.
References
Basile, A., Handy, S., & Fret, F. N. (2015). A Retrospective Look at the Sarbanes-Oxley Act of 2002-Has it accomplished its original purpose?. Journal of Applied Business Research (JABR) , 31 (2), 585-592.
Pozner, J. E., Mohliver, A., & Moore, C. (2018). Shine a Light: How Firm Responses to Announcing Earnings Restatements Changed After Sarbanes–Oxley. Journal of Business Ethics , 1-17.
