Created in 2002, the Sarbanes-Oxley Act set new standards for public companies to follow when incorporated in the United States. New rules were implemented requiring public accounting firms, board of directors requirements, and management ethics to prevent additional corporate scandals that were occurring frequently at the time. There are several key points to examine with this law, so here are the Sarbanes-Oxley Act pros and cons to consider.
What Are the Pros of the Sarbanes-Oxley Act?
1. It holds companies responsible for their actions.
In the past, public businesses weren’t required to be very transparent with the general public. Even shareholders at times would have a difficult time getting the information they needed about their investment. By requiring clear accounting practices and defining ethical transactions, there is a clear outline that businesses must follow in order to provide transparent services.
2. It forces public companies to provide due diligence materials.
Even when potential investors would call for accounting spreadsheets or future outlooks, a company didn’t have to provide accurate information. They could instead provide summaries or outlines that helped to support the benefits of an investment even if they were phantom benefits. The 2002 law stopped this practice from happening.
3. It holds those who create the financial information personally responsible for their actions.
Executives in the past were often not held personally or criminally accountable for their actions in misleading consumers and shareholders. The Sarbanes-Oxley Act changed that because it outlined what steps executives and other employees would need to follow to avoid being held responsible for the inaccurate information that they may be reporting.
4. It restored consumer confidence.
Because any potential negative impacts had to be evaluated and published by companies, it gave investors an easy way for them to perform their due diligence before making an investment. This helped to restore some of the trust that investors had lost in public businesses during this period of time because of all the false information that had been offered instead.
5. There are better internal control environments.
Better internal controls lead to the development of more accurate information. With accurate information, better planning and investing can happen in the short- and long-term perspective.
What Are the Cons of the Sarbanes-Oxley Act?
1. It increases the cost of doing business.
With added regulatory control comes higher administration costs. Most businesses aren’t just going to eat the higher costs when they occur. They’ll raise the price of the goods or services that they are providing instead. It isn’t the business that ultimately pays for better regulatory control and added individual responsibility. It’s the customers of that business and its shareholders.
2. It offers unclear loopholes that may not solve any problems.
The Sarbanes-Oxley Act requires companies to develop their own system of “personal” responsibility. This means that every company must create their own specific guidelines from the generic structural outlines that the law provides. If the accountability system implemented is found not to conform to standards, then the consequences handed down to the business could be just as severe as if they’d misled people in the first place.
3. It limits economic opportunities.
When people are forced to spend more on the goods and services that their lifestyle demands, it means there is less money available for other things that are enjoyed. If a household has $200 to spend and their wireless bill goes from $100 to $135 to compensate for the requirements of the Sarbanes-Oxley Act, then that’s $35 that is potentially being taken out of the local economy.
4. It increases auditing fees for everyone.
Because Federal auditors are required to look at items in great detail, it takes more time for them to complete the process. This affects all companies because it affects the auditing fees that are required for all businesses. It happens even when it is a small private businesses that is not subjected to the Sarbanes-Oxley Act. The model is slow, expensive, and designed more for large organizations and that slows down the pace of business.
5. Even the government can’t get things straight.
The SEC and the PCAOB (Public Company Accounting Oversight Board) don’t agree with what needs to be reviewed or how to make the process more efficient.
A vast majority of the jobs that are created in the United States come from small business owners. Although the benefits of the Sarbanes-Oxley Act have clear benefits, there are also clear disadvantages that have also been created. This means taking another look at this law might be in all of our best interests.
Crystal Lombardo is a contributing editor for Vision Launch. Crystal is a seasoned writer and researcher with over 10 years of experience. She has been an editor of three popular blogs that each have had over 500,000 monthly readers.