The Sarbanes-Oxley Act’s Success or Failure

The Sarbanes-Oxley Act (SOX) is a legislative response to financial scandals between large American companies and, as a result, a decrease in investor confidence. The US Senate passed this new law in a short time: in March 2002, there was only a Ten Point Plan (Albuquerque & Zhu, 2019). With the signing of President George W. Bush, the Sarbanes-Oxley Act, named after its authors, entered into force on July 30, 2002.

Business Progress Following the Sarbanes-Oxley Act

The law delegates the development of implementing and detailed provisions, with precise time horizons, to the oversight body of the American Stock Exchange. That is, the Securities and Exchange Commission and the newly formed Public Company Accounting Oversight Board. SOX promotes awareness of control and oversight activities in enterprises. Implementation has significant financial, time, and organizational implications, but companies also recognize the associated benefits.

With the Sarbanes-Oxley Act implementation, financial processes become more centralized. Preventive, governance measures tend to be more balanced than disclosure and more automated in the long run (James & Lirely, 2021). Significant improvements are taking place in understanding our processes, process design, risk assessment, and process standardization. Most companies have doubts about improving the reliability of financial statements and assess the adequacy of the required testing as too extensive.

SOX measures can help prevent financial fraud, especially at the middle and lower levels of the hierarchy, while most deny this at the top level. Examples of US companies that have already completed SOX have shown that the cost and complexity of implementation were often underestimated in the past. Therefore, companies need to find the optimal alignment between internal project teams, external consultations, internal audits, and collaboration with an auditor. In addition, timely precautions must be taken to ensure the sustainability of SOX investments.

Some Flaws in the Act

In some cases, companies lack proper control procedures to minimize the risks associated with the financial reporting process. Due to the specifics of their activities, some enterprises cannot close the period, monthly or quarterly, for the regular preparation of financial statements (Kecskés, 2016). Therefore, some significant adjustments related to, for example, accruals, provisions, analysis of assets for impairment are made irregularly, and in some cases, only at the end of the year. Accordingly, some companies only once a year have the opportunity to demonstrate in practice to an independent auditor the effectiveness of control over the process of closing the reporting period and reporting.

In addition, various businesses keep records by local accounting standards, for example, national accounting standards or IFRS, and very rarely use US GAAP as their primary accounting method. It is the preparation of financial statements following US GAAP, including the disclosure of the required information, that fulfills the requirement (Harris et al., 2017). For such companies, they must first prepare financial statements per US GAAP to report on Form 20-F, including disclosing all needed information. In Europe, the situation is further complicated by the transition to IFRS in 2005, which requires significant changes to the closing and reporting processes in general.

Protection or Harm?

The Sarbanes-Oxley Act was dedicated to developing an effective anti-fraud program and building confidence in the business. Although there has been a tightening of the rules on the composition of audit committees and the independence of the SOX auditor, internal control in companies ultimately depends mostly on necessary company management experience (Gu & Zhang, 2017). Initially, only 4 out of 13 companies saw the best ways to detect and prevent fraud with SOX.

It would be difficult to achieve the expected positive results in the fight against financial reporting fraud if the law did not increase corporate and criminal liability for these acts. For example, deliberate falsification of documents threatens the fraudster with a fine or even imprisonment (Goel, 2017). Initially, in my opinion, the law did not have much impact on the prevention of fraud. Over time, with the additions to the law, the efficiency has increased significantly.

Although the employment organization was highly divided, it could not argue against the law effectively. On the one hand, large corporations supported the draft law in order to demonstrate their attitude to financial scandals in the US and, at the same time, not to approach the companies involved in it. On the other hand, primarily small business representatives opposed the bill’s adoption (Chang & Choy, 2016). The administrative burden and costs that the bill envisages will exert too much influence on them.

The law’s passage led to a reasonably large segment of the US corporate sector deciding to change its status using private capital markets. It was done to avoid the need to disclose confidential corporate information directly related to the salaries and earnings of senior management. The main disadvantage of the Sarbanes-Oxley Act is that it was passed and drafted without taking into account the differences in the forms of ownership of American firms and corporations. In this regard, any draft legislation with universal rules of law will impose high net costs on the corporate sector. The conclusion follows that the legislation regarding the fight against fraud in financial reporting still has a lot to develop.


Albuquerque, A., & Zhu, J. L. (2019). Has Section 404 of the Sarbanes–Oxley Act discouraged corporate investment? New evidence from a natural experiment. Management Science, 65(7).

Chang, H., & Choy, H. H. L. (2016). The effect of the Sarbanes–Oxley Act on firm productivity. Journal of Centrum Cathedra, 9(2), 120–142.

Goel, U. (2017). Corporate governance: Indian perspective with relation to Sarbanes–Oxley Act. International Conference on Economics and Development.

Gu, Y., & Zhang, L. (2017). The impact of the Sarbanes–Oxley Act on corporate innovation. Journal of Economics and Business, 90, 17–30.

Harris, P., Kinkela, K., Arnold, L. W., & Liu, M. (2017). Corporate accounting malfeasance and financial reporting restatements in the Post-Sarbanes-Oxley era. Review of Business & Finance Studies, 8(1), 41–48.

James, H. L., & Lirely, R. (2021). The propensity to save: The effect of the Sarbanes–Oxley Act. Review of Financial Economics.

Kecskés, A. (2016). The Sarbanes–Oxley act from a legislative viewpoint. The Theory and Practice of Legislation, 4(1), 27–43. Web.

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