Tax Practice and Ethics, Communicating Research Results
In response to such outrageous acts of malfeasance as Enron, Worldcom, and other
companies in the late 90’s into 2000 the government enacted the Sarbanes Oxley Act, named
after its two primary sponsors, in 2002. The act set up new rules for publicly traded corporations
as to financial reporting requirements, internal audits, accountability, responsibility, and other
practices of business. This law was enacted in an attempt to reassure investors they were not
being played by big corporations and being taken advantage of by riskier business practices
(Kleckner, & Jackson, 2004). As with all new laws there were both supporters and detractors of
the new law. The opposition argued that Sarbanes Oxley would fall too heavily on the smaller
public firms being a burden they could not afford (Gao et al 2009.) While others celebrated the
new law as the answer to the corrupt practices of business criminals. For taxation purposes
Sarbanes-Oxley has both its advantages and disadvantages.
Advantages of Sarbanes-Oxley
The primary requirement of Sarbanes Oxley is for the Chief Executive Officer and Chief
Financial Officer in the form of making them responsible for the financial statements of the firm.
These two are required by the law to sign off on the veracity and truth of the financial statements
presented by the firm. This requirement creates a large tax advantage for any corporation that
complies with the Sarbanes-Oxley Act of 2002. This requirement creates a more accurate and
reliable set of financials. Through this more accurate and reliable financial data, the corporation
lessens its IRS audit risk. The accuracy of their financials allows corporations to analyze trends
and assist them with tax planning. (Jahmani, Y. 2008).
Another requirement of the Sarbanes-Oxley Act of 2002 is for an independent external
SOX auditor to review controls, policies, and procedures. (Sarbanes Oxley 101). These
independent audits have been shown to provide additional tax and financial reporting benefits for
companies. Such as ensuring more accurate tax payments, dividend distributions, and investor
protection and confidence. As Seetherman et al (2011) put it “In a post-Sarbanes-Oxley
environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest
themselves in higher quality tax-related financial statement management assertions” (p691).
Disadvantages of the Sarbanes-Oxley Act of 2002
A major disadvantage to the Sarbanes Oxley act, of course would have to be the initial
investments for compliance issues. “Certainly, compliance costs are increasing, perhaps
doubling, to get control systems fixed, add compliance executives and compensate board audit
committees now doing more work” (Forbes 2003). Unfortunately, for most firms the cost of
compliance outweighed any tax advantages they gained from the Sarbanes Oxley act. As pointed
out by Koehn, & DelVecchio (2006) in their article Revisiting the ripple effect of the Sarbanes
Oxley Act “A survey by Financial Executives International reported that small
companies anticipated spending $824,000 to comply with SOX and that the average cost for all
companies is $4.3 million” (p33).
The second disadvantage of the Sarbanes-Oxley Act of 2002 is of course the stiff
penalties that come along with non-compliance. The Sarbanes-Oxley Act of 2002 has penalties
upwards of $5 million in fines and 20 years in prison, for non-compliance. These penalties might
seem insignificant to a large firm such as Apple or Xerox but consider the smaller firm with
minimum income potential that has just released its public offering. Such firms as Bethesda
games at the time was a much smaller firm. Yes, they went public, but their initial public
offering was minimal compared to most firms. They gained what funding they needed to
continue to operate they did not make huge gains from their public sale of stock, maybe a few
million. For a company like that it was very difficult to come up with the initial costs of
compliance, and put into this they now have to fear jail and fines for non-compliance?
Personal Perspectives
It has been almost 20 years since Sarbanes Oxley was enacted into law. Sarbanes Oxley
was intended to improve the behavior of large firms and their accountants. It was because of the
malfeasance of Enron and the cooperation of their accountants this law was written. The main
purpose of the Sarbanes-Oxley Act of 2002 was to improve the behavior and accounting
practices of publicly traded companies and their auditors. The Sarbanes-Oxley Act of 2002 has
strengthened investor confidence, improved the reliability of financial reporting, and increased
corporate governance within public companies and private companies alike. The Sarbanes-Oxley
Act of 2002 has done a fair job of protecting investor interests. It is this authors opinion that
Sarbanes Oxley has done what it was intended to do. Although as with all laws some adjustments
still need to be made for the small business just going public to reduced the initial cost of
compliance, and allow for these smaller firms to access the investment capital of the stock
exchange.
References
Gao, F., Wu, J. S., & Zimmerman, J. (2009). Unintended Consequences of Granting Small Firms
Exemptions from Securities Regulation: Evidence from the Sarbanes-Oxley Act. Journal
of Accounting Research, 47(2), 459–506. http://www.jstor.org/stable/25548028
Forbes. (2003, July 22). One Year Later, The Impact Of Sarbanes-Oxley. Retrieved from
https://www.forbes.com/2003/07/22/cz_af_0722sarbanes.html?sh=2bbdc0e16738
H.R.3763 - 107th Congress (2001-2002). (2002, July 30). Sarbanes-Oxley Act of 2002.
Retrieved from Congress.gov: https://www.congress.gov/bill/107th-
congress/housebill/3763
Jahmani, Y. a. (2008). The Impact of sabanes oxley act. Journal of Business & Economics
Research, 6,(10). doi:https://doi.org/10.19030/jber.v6i10.2479
Kleckner, P. K., & Jackson, C. (2004). Sarbanes-Oxley Act: expanded enforcement. The CPA
Journal. The CPA Journal, 74(9), 13.
Koehn, J. L. (2006, May). Revisiting the Ripple Effects of the Sarbanes-Oxley Act. The CPA
Journal, 32. Retrieved from http://archives.cpajournal.com/2006/506/essentials/p32.htm
Sarbanes Oxley 101. (n.d.). Retrieved from Sarbanes Oxley 101: https://www.sarbanes-oxley-
101.com/
Seetharaman, A., Sun, Y., & and Wang, W. (2011, August 24). Tax-Related Financial Statement
Restatements and Auditor-Provided Tax Services. Journal of Accounting, Auditing &
Finance. doi:https://doi.org/10.1177/0148558X11409146
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