Sarbanes-Oxley Act was signed into law in 2002 to reestablish confidence in financial institutions through market regulation and economic legislation. However, before the Act was enacted corporates experienced significant losses due to their failure to observe the right methods to conduct their business operations ( Gu & Zhang, 2017 ). As a result, Sarbanes-Oxley Act was established to address fraud issues relating to accounting in an attempt to improve the consistency and precision of business operations.
In both the past and present view of business operations in an organization, the analysis of financial statements is carried out by auditors. However, the implementation of the Act promoted an increase in accountability among auditors in any organization, enhancing professionalism in the service delivery. The main objective of the Act was to ensure cases of financial scandals in an organization that existed in the past were curtailed since they influenced public’s view on financial organizations ( Chhaochharia, Grinstein, Grullon & Michaely, 2016 ). Notably, after the Act was enacted, cases of fraud that dominated organizations were significantly reduced. Cases of financial frauds cause taxpayers and stakeholders to incur high margin losses. For example, statistics show that in years between 1994-1997 investors lost over $900 billion to accounting frauds. However, after the Act was signed, such losses from fraud significantly reduced.
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By comparing management and account views, it is evident that they both display professionalism. However, professionals in accounting were ineffective in their job performance in the past. The ineffectiveness is manifested by failure of the auditors to curb financial frauds that resulted in the public raising questions on the independence of financial institutions. This contrasts the concept of Sarbanes-Oxley Act that was established to reinstate public faith in financial institutions by ensuring financial records were reliable ( Gu & Zhang, 2017 ). Moreover, the Act ensured the auditors monitored any irregularities, and there should be no incidences of financial scandals at any organization. In comparison to the past view of management, several anomalies existed due to lack of proper observance of the institution’s performance. Also, the act confines the amount of information that can be provided by auditors to public enterprises. This contracts the past system that allowed interactions between an organization and its accounts.
The Sarbanes-Oxley Act created positive changes within businesses as compared to the past management operations, where business practices were faced with several challenges. The act restored the dependability of financial records by re-establishing public confidence. Also, by ensuring internal control, organizations were able to produce reliable information during business operations. However, this contrasts with the past internal control where investors were not provided with information on their records. Another critical aspect of the Act is that it resulted in excellent company governance as compared to the original view of management that was poorly governed ( Chhaochharia et al., 2016 ). Therefore, institutions with strong corporate governance enhance professionalism and will possess ethical values that will promote employees’ performance.
The Act enhanced independence among the directorate due to its efficiency in reducing the number of fraud cases and the internal control mechanism. As a result, at any given organization, the turnout of the board of directors is increased ( Chhaochharia et al., 2016 ). Also, through the Act, the company can easily regulate its operations. The most significant aspect of the Act since its establishment was the reduction of financial scandals. The number of deliberate scandals was prominent in the period before the Act was enacted. Therefore, the Sarbanes-Oxley Act has a positive impact as it led to a decrease in fraud incidences as compared to the past where massive cases of fraud existed. Moreover, market liquidity improved after the establishment of Sarbanes-Oxley Act ( Gu & Zhang, 2017 ). Therefore, the act primarily focuses on the success of business operations of any organization and offers ways to cope with challenges that arise as a result of management inefficiency.
References
Chhaochharia, V., Grinstein, Y., Grullon, G., & Michaely, R. (2016). Product market competition and internal governance: Evidence from the Sarbanes–Oxley Act. Management Science , 63 (5), 1405-1424.
Gu, Y., & Zhang, L. (2017). The impact of the Sarbanes-Oxley Act on corporate innovation. Journal of Economics and Business , 90 , 17-30.
