Sarbanes Oxley Act of 2002: A Response to High-profile Corporate Failures

Surbanes Oxley Act 2002
Historical forces have a way of acting in concert, even when propelled by markedly different factors.
In the United States, a spate of astonishing high-profile corporate failures have shaken investor confidence and placed corporate fraud and accounting abuses center stage before the public and its governmental representatives. The legislative response to these events was the rapid passage of the Sarbanes- Oxley Act (the Act) of 2002, which virtually overnight transformed the landscape of financial reporting and corporate responsibility. Within the same relative time frame, the European Union (EU) has been pushing to eliminate barriers to cross-border trading in an effort to support the creation of a single capital market environment. In this pursuit, the EU has adopted the International Financial Reporting Standards (IFRS) initiative, which calls for a uniform accounting and reporting standard to provide internationally comparable financial and non-financial information on which to base economic decisions.

The combined effect of these developments is an unparalleled emphasis, worldwide, on corporate governance—which every corporate executive is now mandated to oversee directly. Corporate governance, broadly defined, is operating a business in compliance with all applicable government and agency laws and regulations.

The latest regulatory demands that affect corporate governance shift to a principle-based paradigm from the historical rules-based model for public accounting, reporting, and disclosure of financial and non-financial information. While there are significant differences in terms of objectives and process for Sarbanes-Oxley and IFRS, it can be said that both initiatives push towards achieving:

• Transparency of disclosure
• Integrity of operations
• Financial accountability for accurate reporting
Bringing organizations into compliance with new demands for corporate governance is having immediate and long-term effects, not the least of which is the cost of compliance. Numerous studies have gauged the cost of complying with Sarbanes-Oxley—a recent analysis in CFO Magazine puts the cost for public corporations in the billions, with first-year cost per company averaging half a million dollars. These costs reflect both the initial expense of retaining more legal and accounting personnel to meet the greater demands of the new requirements, and the ongoing burden of keeping compliance current as changes occur over time.

Sarbanes-Oxley compliance is required of all publicly traded companies on a regulated market under the jurisdiction of the U.S. Securities Exchange Commission. (SEC). It is applicable to all U.S.-based corporations and their associated global operations. IFRS has been adopted by the EU and incorporated in principle in Australia, South Korea, Philippines, Malaysia, and Singapore. There is continued movement in both Eastern European and Nordic countries as well.

While the preponderance of Sarbanes-Oxley’s provisions address the financial and reporting practices undertaken by publicly traded concerns, other provisions of the Act address more general operating concerns (e.g., corporate transparency, employee ethics). These standards will likely affect private companies as well as public ones, both directly and indirectly. Directly, the implicit threat of heightened sanctions may become explicit for private companies through government investigations and enforcement; indirectly, public opinion and changing corporate culture may dictate that the higher standards set by Sarbanes-Oxley be met voluntarily.

Much of the discussion of Sarbanes-Oxley has centered on its immediate impact on accounting practices, financial reporting, and corporate governance—but the impact of the Act goes much deeper, to the heart of corporate operations, by directly mandating how companies must retain, control, manage, and utilize their information assets. This...
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