In the recent years, the issue of corporate governance has increasingly become a subject of scrutiny by the stakeholders in any given organisation. Further, it has become mandatory for board of directors in most firms to comply and deploy set of financial management standards, in order to enhance short and long term sustainability of their firms. As argued by Goelzer (2005), corporate governance is the system through which firms are controlled and directed. This entails a set of association between management and the stakeholders in mitigating conflict of interest to the stakeholders. In countries, such as the U.S. and U.K., corporate governance practises are not regulated by any given statute, but instead they are affected by corporate law, the governing instruments, and federal securities laws among others notable legislations. This paper will critically evaluate on the ways in which Sarbanes-Oxley Act (SOX) and the PCAOB (Public Company Accounting Oversight Board) has affected corporate governance of companies operating in the U.S.
The Sarbanes-Oxley Act (SOX) is a law passed by the U.S. congress on July 2002. This was in response to an increasing number of major accounting and corporate scandals, such as those which affected WorldCom, Tyco international, and Enron among other notable firms. Rand Corporation (2011) indicates that, this legislation was aimed at raising regulation and oversight of accounting profession as well as strengthening the level of transparency in financial audits and corporate governance. The notable provisions of the SOX include:
- establishment of the Public Company Accounting Oversight Board (PCAOB) to lay down auditing standards
- setting stricter crimes penalties regarding corporate fraud
- setting detailed as well as timely disclosures of the financial information
It is notable that the SOX legislation was quickly passed by the Senate. Due to this, the cost of compliance has in most cases exceeded the benefits obtained from its enactment, especially the small and foreign firms (D’Aquila, 2007). For instance, it is estimated that on annual basis, the total private cost spent towards complying with the Sarbanes-Oxley legislations is more than $ 2.8 trillion. Studies have indicated that 80% of this high cost originates from the raised auditing cost, in order to comply with the SOX law. Consequently, private firms have been motivated to go public and vice-versa, with an aim of avoiding the compliance costs. Further, foreign firms have drastically shunned investing in the U.S. financial markets, in order to stay clear of this particular legislation.
As argued by Koehn & DelVecchio (2006), it is clear that the additional benefits obtained from improved disclosures do not at all justify additional disclosure costs at all. Menon and Williams (2001) contend that the SOX was a costly and unnecessary intrusion by the U.S. government into corporate management. As indicated above, the legislation place most of the U.S. corporations at an enormously competitive disadvantage as compared to their counterparts in foreign countries, thus driving businesses out of the U.S. Marshall (2006) indicates that the additional compliance cost should be catered for by the federal government, in order to encourage foreign firms and small businesses register on the NYSE (New York Stock Exchange). It is clear that by tightening disclosure rules, only the well established firms have been able to benefit from the Sarbanes-Oxley legislations. This is due to the fact that the regulation has made the small firms to derive reduced average benefits and higher average costs as compared to the well established firms.
In conclusion, the Sarbanes-Oxley Act should be carefully re-evaluated, in order to ensure fair trading grounds for all companies in the U.S. regardless of their market share (Hayes and Wang, 2004).