ESSAY 1: ADVANTAGES & DISADVANTAGES OF SOX
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Essay 1
Lionel S. Boayue
School of Business, Liberty University
ACCT 612 Week 1
Dr. Janet Forney
March 14, 2022
ESSAY 1: ADVANTAGES & DISADVANTAGES OF SOX
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America and the world in the early 2000’s witness big corporations file for bankruptcy on
a large scale. This was due to financial malpractices and the tempering of financial documents by
top executives. Large corporations like Enron and WorldCom were involved. These were two
giants in their respective line of business. The stocks of these companies were booming and due
to the financial scandals, the stock prices plummeted, and investors lost billions of dollars and
also lost confidence in the stock market after that. This created a serious problem as companies
were not regulated and played with financial records by misrepresentation of number on their
financial statement.
Due the failures of these companies to report factual financial numbers to their investors,
in 2002 the US congress reviewed and passed a legislation into law called the Sarbanes-Oxley
Act of 2002. This was meant to protect investors and shareholders from companies involved in
financial malpractices and misrepresentation of accounting data. The original aim of Sarbanes-
Oxley was modest, to improve the accountability of managers to shareholders, and hence to calm
the raging crisis of confidence in American capitalism aroused by the scandals at Enron and
WorldCom and other companies”. On the overall, the SOX was meant to improve corporate
governance by dedicating more responsibilities to top executives and having them sign off on
financial reports files with the Security and Exchange Commission (SEC). But like every
legislation or law, there are those that oppose and those that support it.
Advantages of Sarbanes-Oxley Act 2002
Congress created and passed SOX into law with one purpose, protecting investors and the
public from companies practicing and reporting false financial information. This created many
advantages for shareholders and companies alike. The reliability of financial information as
published and filed by companies that are publicly traded in addition to fighting fraud. The entire
ESSAY 1: ADVANTAGES & DISADVANTAGES OF SOX
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Sarbanes-Oxley contains 11 titles or sections with each sections having additional details. There
is a section called Corporate Social Responsibility and it allows shareholders and investors to
know and identify who within the organization is validating the authenticity and accuracy of the
financial data published. It specifically named the CEO and CFO as the top executives
responsible for validating the completeness of financial information. Another advantage of SOX
is that it increased the responsibilities of top executives to provide transparency and financial
control. According to Bentley (2010), “In a survey conducted with more than 400 executives,
fifty-four of those interviewed said Sarbanes-Oxley compliance allowed them to better
understand how their internal controls are designed and what makes them effective. Executives
must have a thorough understanding of the SOX, and this enables them to better apply the
“Enhanced Financial Disclosures” section.
Another advantage of SOX is that it provides a strong line of defense in how companies
maintain accuracy through internal control testing thereby ensuring that transactions are executed
properly so that it doesn’t affect the companies’ investors. In the Sarbanes-Oxley Act of 2002, it
was stipulated that companies will maintain and test their internal control systems on a quarterly
basis and make reports on how those controls are functioning. The issues with Enron and
WorldCom were that internal controls were not tested and reported in a quarterly basis leaving
their investors in a very unhealthy investment environment. The leaders of Enron took advantage
of the laps in the internal control to manipulate the system and override proper financial
reporting procedures. Auditors are also mentioned in the SOX, that auditors must attest to the
assessments or validity of reports as asserted by company leaders.
As companies began to do better with complying to SOX, auditors will be able to
perform their audits better and with more independence without inference from the company.
ESSAY 1: ADVANTAGES & DISADVANTAGES OF SOX
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Companies must have a committee called the audit committee that must liaise with external
auditors to conduct compliance related audit. As the auditors conduct the audit, they must ask
relevant questions to determine the legitimacy of the controls in place. According to Bedard &
Graham (2011), “with this being the case, auditors cannot only be tasked with verifying that a
company’s financial information is correct, but also be assigned to verify that the process used to
report and compile the financial information has enough internal controls in place to reduce the
chance of misreporting or fraud. It ws found that auditors detect about three-fourths un-
remediated internal control deficiencies.”
Disadvantages of Sarbanes-Oxley Act
SOX like any other legislation did not appeal to all that were involved with the law. There
are some that find the law to not be beneficial to their organization. One of the main
disadvantage of SOX is that it can be difficult for smaller public companies to adhere to all the
requirements and standards as the required by big corporations. There are huge financial
implications or burden for smaller publicly traded companies trying to adhere to the SOX
requirements. A lot of resources go into adherence with the SOX, meaning that lot of money goes
into simply following the procedures. “A healthcare executive once stated that when an has to
spend $1 million to comply with all the Sarbanes-Oxley requirements, the smaller the company,
the more burdensome that cost becomes (Cziborr, 2005).” In smaller companies, they have to
maintained internal controls in addition to the cost of adhering to SOX requirements. Some small
companies will find it difficult to adhere to SOX requirements because they have a small group
of staff and must add more accounting personals. “Using current employees outside the
accounting office is not acceptable because it breaks down the internal controls’ functions (Vitez,
2009)”.
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Opinion of the Success of SOX
In my opinion, SOX have been really successful in trying to minimize the effects of
losing investors funds by delegating the responsibilities of verifying the authenticity of financial
reports to the CEO and CFO of any organization that is publicly traded. Since the financial
scandals that the rocks the USA and the world in the early 2000’s, Congress took steps to
empower government agencies to regulate publicly traded companies and how they manage
investors funds. “With time, companies will adjust to the adherence of SOX and will be able to
maintain the integrity of financial reporting to investors so that they can feel comfortable to
continue the flow of funds to the organization (Bentley (2010)”. However, albeit, smaller
publicly traded company will always have difficulties and will be affected negatively by the cost
of adhering to the sections in the SOX that pertains to their companies. “This is not a matter of
one’s opinion, Congress has directed the SEC to reevaluate and quantify in specific hard dollars
the costs to companies complying with OSX (Jahmani & Dowling, 2008)”. SOX is a law that
was passed because investors lost billions due to greedy executives of large corporations who
tempered with financial data by reporting false information. Congress specifically tailored
sections of the Act to maintain the proper control over financial reporting. “A focus on the
control environment helps ensure that the control themselves are the second and third line of
defense and not the first (Dittmar & Wagner, 2006)”. SOX was designed to ask questions about
the financial details of publicly traded companies because investors didn’t.
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References
Bentley, L. (2010, June 25). Survey: Sarbox Compliance Does Pay Off Over Time. Retrieved
from http://www.itbusinessedge.com/cm/blogs/bentley/survey-sarbox-compliance-does-
pay-offover-time/?cs=41941
Cziborr, C. (2005, August 8). Critics say accounting reform has gone too far: costly new rules in
Sarbanes-Oxley Act of 2002 create woes for public companies. San Diego Business
Journal, 26(32), 17+. Retrieved from http://go.galegroup.com.ezproxy.emich.edu/ps/i.do?
p=ITOF&sw=w&u=lom_emichu&v=2.1&it=r&id=GALE
%7CA135467221&sid=summon&asid=998057a3ff96d77fe007a9cb5250f4d9
Jahmani, Y., & Dowling, W. (2008). The Impact of Sarbanes-Oxley Act. Journal of Business &
Economics Research,6, 10th ser. Retrieved from
https://cluteinstitute.com/ojs/index.php/JBER/article/viewFile/2479/2525.
Jean C. Bedard and Lynford Graham (2011) Detection and Severity Classifications of
SarbanesOxley Section 404 Internal Control Deficiencies. The Accounting Review: May
2011, Vol. 86, No. 3, pp. 825-855
Wagner, S., & Ditmar, L. (2014, July 31). The Unexpected Benefits of Sarbanes-Oxley.
Retrieved from https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
Vitez, O. (2009, October). What Are the Disadvantages of Sarbanes Oxley? Retrieved from
https://www.sapling.com/5494421/disadvantages-sarbanes-oxley
