Assess the Effectiveness of SOX Legislation

The Impact of the Sarbanes-Oxley Act (2002)
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The History of SOX
The Public Company Accounting Reform and Investor Protection Act which is prominently referred to as the Sarbanes–Oxley Act (SOX) after the sponsors is a federal law of the United States that was enacted in 2002. Between 2000 and 2002, the US witnessed massive corporate scandals that led to the loss of millions for investors. At the top of these scandals were Enron Energy Company and the WorldCom telecommunications company. Through scrupulous methods, the managements of these enterprises in collaboration with their common auditor Arthur Andersen had managed to hide billions of dollars in losses. The resulting hyperinflation of false profit led to massive losses in investors. Enron, for example, had its stock price plummet from a high of 90.75 in the middle of 2000 to less than a dollar by the end of next year. The two companies ultimately went bankrupt heavily damaging the reputation of US security markets globally. (Tran, 2016)
In an attempt to rescue the lucrativeness and reputation of the industry, Congress act hurriedly to improvise ways of reassuring investors on the safety of their investments. SOX Act was therefore implemented with the aim of curbing the endemic fraud levels in public companies as well are reassuring investors. As a reaction to the prevalent fraud revelations, House Representative Oxley and Senator Sarbanes independently supported bills in respective houses regarding the regulations of reporting in public corporations.

(Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements, 2009) Both bills received almost unanimous passing in separate houses, and thus the two houses formed a conference committee. This committee would be tasked with reconciling the differences between the two acts. On the 24th of July 2002, the board passed the final version of the law which was adopted by an overwhelming majority in both houses. On 30th of the same month, President Bush assented to the bill making it effectively a federal law in the US. Among the immediate effects was the institution of the Public Company Accounting Oversight Board which would have the mandate of ensuring compliance with the stated laws.
Key Ethical Components of the SOX
The scandals that led to the formulation of SOX expressed grave ethical issues. Previous to the enactment, it was possible for auditing companies to offer numerous other services to the same company. As a result, sometimes the potential, loss of disclosing a company’s failure and ruining relationships were far more impacting that the benefits of maintaining proper accounting records. Big corporations were, therefore, able to pressure auditing companies to conceal accounting errors, and the auditors were only happy to oblige.
The primary goals of the Act were, therefore, to reinstate proper conduct within both auditing and corporate circles. All the eleven features of the Act regard ethical standards for particular stakeholders within the industry. This includes:
Disclosure controls
In this component, all public companies would be required to have private means of ensuring that financial reports are accurate. The signing officials would henceforth be personally responsible for any discrepancy in the reports. This move was advanced to ensure that company officials were serious in maintaining proper records. External auditors would be required to ascertain that the reported financial details were accurate. (Jahmani & Dowling, 2008)
Improper influence on conduct of audits
As determined earlier, the collapse of the main companies that led to the formulation of SOX had resulted from collusion with external auditors. The law, therefore, had at its prime interest the regulation of auditors conduct. To prevent any conflict of interests, the policy mandated that an external auditor offers no other services to the firm. In addition to this, there was the implementation of severe punishments for any individual coercing auditors into protecting fraudulent activities. The penalties would be equally severe for auditors protecting the illegal manipulation of records. In particular, it would be an offense for the auditor to destroy or withhold essential information from investigators thus impeding proper legal procedures. These procedures were intended to increase honesty and transparency in auditing firms. The responsibility of an auditor is to protect the investor from fraud, and thus previous actions were grossly inappropriate.
Disclosures in periodic reports
Companies were suing off balance sheet items to manipulate the companies accounting outlook. SOX thus mandated that all public companies disclose the value of off-balance sheet items and state the use of these items. This would henceforth increase transparency within the organization.
Assessment of internal control
In what is the most prominent segment of the Act, a company’s management is mandated to ensure there are adequate internal controls to ensure accurate financial reporting. To affirm this, every year, a company must produce a report of this accompanied by the fiscal analysis of the previous year. The aim of this was to ensure that management actively took responsibility for misconduct through the endorsement of the current internal control measures. The appropriateness of the internal control would be assessed through its ability to identify and avert a case of misstatement. It was thus deemed to enhance transparency within organizations.
Criminal penalties for influencing US Agency investigation/proper administration
Through section 802(a) of the Act, any individual who impeded the process of investigation into possible fraud would be prosecuted. This section details the severity of the possible punishment encouraging compliance during investigations. This would be ethical because it would assist in preventing exploitation of investors through improper financial reporting.
Criminal Penalties for CEO/CFO financial statement certification
To ensure the compliance of top management, SOX indicated that the CEO’s would take personal responsibility for the failure of companies. The certification of any documents on whose signature would be appended thus had to be completed with thorough care to avoid mistakes. (Jahmani & Dowling, 2008)Any CEO who appended a signature on false records would be liable to substantial legal penalties.
Criminal penalties for retaliation against whistleblowers
Whistleblowers perform an important task of creating awareness on fraudulent activities. However, their actions have the capacity of causing millions of losses to companies and thus may be at risk of retaliation. The SOX made it a criminal activity liable to the legal action to threaten retaliation to whistleblowers. A whistleblower is that protected by the law to perform their ethical duty of exposing fraud in accounting records.

Social Responsibility Implications Regarding Mandatory Publication of Corporate Ethics
Mandatory publication of corporate ethics is a policy that a section that requires all the companies to draft an ethics rule that will determine the conduct of its chief financial officers. This makes the organization officials socially responsible to the employees, the stakeholders, the customers and the stockholders. (Wagner & Dittmar, 2006)
One of the effects of the implications of this act was fostering public trust in public companies. Where previous actions had reduced trust in security trading, this measure assured the investors that they could invest with minimal risk.
This section also introduced mandatory institution of outer members of the board on public companies which have a positive impact on CSR performance. The persistent limelight on the boards has caused increased attention on records and business decisions thus reducing risks. (Wagner & Dittmar, 2006)
This, in turn, may have had a negative impact. The concentration on the generation of profits to ensure that none of the stakeholders is hurt meant that boards no longer kept in touch with the external environment. This leads to greater financial catastrophes such as the 2008 economic collapse.
SOX and Small Businesses
The effect of SOX on small companies are far reaching and have pushed critics to call for the policy exception for these enterprises. The primary challenge for small business is personnel. Complete implementation of SOX requires a bloated personnel that is inefficient for small companies. (Magloff, 2016) Since the cost of implementing the policy is fixed, the burden on smaller companies is disproportionate by the weight felt by larger companies. According to a 2005 report, companies with a value exceeding $5 billion spent approximately 0.06% of their revenue to service SOX requirements while those with a value of less than 100 million spent an average of 2.55% of the revenue.
Apart from the personnel, there is also a cost attached to the basic implementation of SOX such as the implementation of compliant financial systems and internal control measures. There is a further need for frequent audits. (Jahmani & Dowling, 2008) These events combined to pose an unmanageable burden to small firms. This is exacerbated by the fact that these firms cannot afford accounting department full of professionals and therefore have to higher auditors every time there is the necessity for auditing. This is accompanied by payments made to PCOAB and the implementation of its requirement for continuous education which cripples the small firm economic output. (Magloff, 2016)
Finally, the policy demands that a company only uses an external service for one function. For example, a company must hire different institutions for tax preparations, auditing, preparations of accounts and so forth. A company thus has to deal with multiple service providers which increase cost immensely and reduces the bargaining power of an organization. (Scott, 2004)
Potential Improvements of the SOX Legislation
One of the potential improvements on the SOX should be aimed at easing the burden on small organizations. While accountability is desirable in these firms too, complete implementation of SOX stunts their growth impeding development. The legislatures can come up with a SOX-lite version that is not as comprehensive to cater from smaller businesses. (Vitez, 2016)
The second improvement would be balancing of policies to reduce the focus on the top management. While the harsh penalties have restored confidence in the US security markets, the contrary is also true to some extent. Investors shun investing in these companies for fear. Any entrepreneurial venture is a risk, and thus so many obstacles can lead to repulsion to investing in the US market.
On the other hand, the excessive company makes companies focus internally on protecting what is already available. There is fear to venture into new grounds to prevent potential losses. Re-evaluating these rules should focus on policies stimulating growth and protecting losses made from sound investments where the losses were unanticipated by the management.

References
Jahmani, Y. & Dowling, W. (2008). The Impact Of Sarbanes-Oxley Act. Journal Of Business & Economics Research, 6(10), 57-65.
Magloff, L. (2016). How Does the Sarbanes Oxley Act of 2002 Affect Small Business Owners?. Smallbusiness.chron.com. Retrieved 17 December 2016, from http://smallbusiness.chron.com/sarbanes-oxley-act-2002-affect-small-business-owners-877.html
Scott, G. (2004). A Look at the Causes, Impact and Future of the Sarbanes-Oxley Act. Journal Of International Business And Law, 3(1), 33-51.
Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements. (2009) (1st ed.). US.
Tran, M. (2016). WorldCom accounting scandal. the Guardian. Retrieved 17 December 2016, from https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2
Vitez, O. (2016). The Impact of Sarbanes Oxley on Small Business. Smallbusiness.chron.com. Retrieved 17 December 2016, from http://smallbusiness.chron.com/impact-sarbanes-oxley-small-business-3797.html
Wagner, S. & Dittmar, L. (2006). The Unexpected Benefits of Sarbanes-Oxley. Harvard Business Review. Retrieved 17 December 2016, from https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley