Sarbanes-Oxley Act I Agree With the Points

Sarbanes-Oxley Act

I agree with the points presented in the Sarbanes-Oxley and Public Company Accounting Oversight Board (PCAOB) essay. Investors and portfolio managers are typically outsiders when it comes to internal financial matters within companies. In order to make informed decisions, they must rely on the good faith and due diligence of corporate insiders. The Sarbanes-Oxley Act offers protection by interjecting ethical behavior and integrity in the public company management and auditing process. Signed into law by President Bush on July 30, 2002, it offers the most massive across the board changes to securities law since the 1930s (Weinberg, 2003). The PCAOB was established to oversee auditors and put severe restrictions on questionable financial reporting and processes.

The strength of U.S. securities regulation is ultimately dependent on disclosure. The best way to protect investors from fraud is to require companies selling stocks and bonds to the public to disclose detailed information about their financial strengths and weaknesses. Without complete and accurate information, investors cannot make rational decisions. Ill-informed investment choices hurt individual investors, but are also costly for the national economy in terms of wasted resources, job losses, and missed opportunities. If investors decide they cannot trust corporate disclosures, they will be less likely to buy stocks and bonds, raising the cost of capital for all firms. This is detrimental to the overall economy. The desire to avoid stock market losses creates a powerful incentive for corporate management to ensure accounting practices that also conceal bad news, as proven by the cases of Enron, WorldCom, and others. These incidents exposed the need to prevent deceptive financial reporting. The U.S. Securities and Exchange Commission (SEC) implemented the Sarbanes-Oxley Act to restore confidence in corporate reporting by enhancing the oversight of financial accounting. Today, the auditing operations of accounting firms are inspected regularly and compliance with PCAOB standards is strictly enforced.

Still, it is often difficult to legislate moral conduct and behavior. Critics of the Sarbanes-Oxley Act cite this as a weakness (Weinberg, 2003). However, I view this in another light, particularly because there are provisions in the Act that offer checks and balances that did not exist prior. It is much harder to have conflicts of interest in corporate accounting today. Auditors used to provide higher margin consulting services to audit clients. Corporate directors often lacked understanding or independence -- or both. Today, firms must register with the PCAOB which acts as an independent, non-profit, self-regulatory organization. This helps ensure standards, quality control and greater transparency in reporting. Auditors now operate under the direct oversight of the SEC.