Effects of Sarbanes-Oxley Act

ABSTRACT

This paper provides an in-depth evaluation of Sarbanes-Oxley Act, which is said to be promoted to produce change in the corporate environment, in general, by stressing issues of public accountability and disclosure in the financial operations of business. It explains how this is an Act that represents the government's and the Security and Exchange Commission's concern in promoting ethical standards in terms of financial disclosure in the corporate environment.

This paper addresses the current criticism of the exportation of U.S. corporate governance norms under the Sarbanes-Oxley Act, focusing on the application of the audit committee requirement to foreign issuers from European countries with codetermination laws, and the prevention of loans to executives with respect to German issuers. In reply to such criticism, the Securities and Exchange Commission (SEC) has already granted foreign issuers several limited exemptions from the Act, as well as an exemption dealing with the audit committee independence requirement, motivated by the desire to reattract foreign companies that canceled listings in the U.S. in response to the Act. This paper provides additional legal and economic justifications favoring the exclusion of foreign companies from the audit committee and loan prohibition requirements.

Corporate greed and corruption has altered the face of American business forever. Corporate greed was the primary reason in the downfall of Global Crossing, Enron and MCI WorldCom. The paper shows that the governing bodies, the Senate, NASD, the Securities and Exchange Commission and other powers that be decided to act and in 2002, the Senate introduced the Sarbanes-Oxley Act of 2002. The paper discussed how this new law impacts CPA's, CPA firms auditing public firms, publicly traded firms and their employees. The paper looks at the mission and purpose of the law and examines its affect on the accounting industry.

GENERAL DISCUSSION

The Sarbanes-Oxley Act, enacted as a reaction to the WorldCom, Enron, and other corporate scandals, improved the regulatory protections presented to U.S. investors by adding an audit committee requirement, intensification of auditor independence, increasing disclosure requirements, prohibiting loans to executives, adding a certification requirement, and strengthening criminal and civil penalties for violations of securities laws.

The Act was criticized for being made appropriate to all foreign issuers listed on a U.S. exchange, even though several of the behavior the Act targeted was either a non-issue in foreign countries or was already efficiently regulated. According to Fraser, I. (Oct., 2002) this broad extraterritorial scope is particularly problematic given that the SEC has encouraged foreign issuers to enter U.S. capital markets by providing several accommodations to foreign practices and polices not inconsistent with the protection of U.S. investors. Foreign companies dispute that, as of the end of 2001, more than 1,300 foreign issuers had entered U.S. capital markets and became reporting companies in reliance on the SEC's accommodations.

According to Bostelman, J. T. (2004), not all of the Sarbanes-Oxley provisions are controversial for foreign issuers. Provisions consistent with foreign regulation and which do not entail additional burdens on foreign issuers, for instance the executive certification requirement, have not raised much publicity. At the same time, provisions attempting to entail additional burdens in areas in which foreign issuers are already regulated by their country of incorporation have involved more criticism. Along with the provisions imposing additional burdens on foreign issuers, the mainly debated one is the provision requiring an independent audit committee. As explained by Silverman, L. N., (Sept., 2003), issuers incorporated under civil law regimes dislike this provision for the reason that it indirectly strengthens labor's bargaining power by giving labor representatives on the audit committee substantive responsibilities and access to susceptible information. Civil law codes frequently require a two-tier board, with the lower or managing board having no independent directors and the upper or supervisory board containing a blend of independent directors and employee representatives. Since employee representatives serve on the supervisory board, civil law corporations have usually resisted giving the supervisory board significant substantive responsibilities. Green, S. (2004) discussed that under the Act, however, labor representatives would be given substantive responsibilities, for the reason that the audit committee must be staffed with members of the supervisory committee, as well as labor representatives. According to Prentice, R. A. (2004), the audit committee provision was also criticized for making it not possible for civil law companies to act in accordance with both the codetermination requirement imposed by the country of incorporation and the independence requirement imposed by the Sarbanes-Oxley Act. The majority members of the supervisory board required under codetermination are not deemed independent under U.S. law: they either control the company or are controlled by employees. This problem was alleviated by the SEC's regulations which present that foreign employee representatives sitting on the supervisory board are permitted to be part of the audit committee, even if they are not exactly independent of the company's executives. According to Osheroff, M. (2004) the SEC exemption does not fully remove the concerns about the audit committee provision; foreign companies are still hesitant about increasing labor's bargaining power and allowing the labor representatives on the committee to have contact to sensitive financial information.

It is hard to justify U.S. regulatory jurisdiction under the effects test in cases wherever foreign regulation by now minimizes the effects of foreign conduct on U.S. markets. Furthermore, comity considerations, in the good judgment of abstention from jurisdiction based upon a need of progress toward the goal of establishing the rule of law between nations, in addition counsel against unilateral assertion of extraterritorial jurisdiction in corporate governance issues. Application of comity would provide a faster and more sustainable rule of law between nations for the reason that it would foster predictability in international transactions and look after the expectation of foreign issuers.

According to Holt, M. (2005), even if the economic justifications for U.S. jurisdiction supported the extraterritoriality of the Sarbanes-Oxley Act, collaboration with foreign states would accomplish the outcomes envisioned by the Act at fewer costs. Even though the need for cooperation has constantly