Financial Reporting Regulation
Introduction
On December 2001, the collapse of Enron and high congressional investigations that followed coupled with additional corporate failures led to the evolution of the Sarbane Oxley. This was necessitated by a public outcry that demanded for reforms on financial reporting so as to restore investors’ confidence. The enactment of the Sarbanes-Oxley act was meant to help rebuild investors’ confidence in generated financial reports. The act also demands that officers in any public company certify for all representations with regard to the fairness within financial reports and the procedures as well as effectiveness of controls of disclosure. All public companies’ internal control measures should also be assessed for effectiveness. The act also led to the creation of the “Public Company Accounting Oversight Board (PCAOB)”.
The implementation of this act has led to the rise of operational expenses with companies having to set up internal control units for internal audits and financing reporting. It also led to a 38% percent increase on external fees levied by external auditors as well as external costs for software and consultation services. The result has been an increase in staff hours dedicated to establishing internal controls, however; these may be one time costs that may go a way after establishment (Bergen, 2005). This mandatory compliance forces public companies to dedicate more investment money into compliance, and as a result; it reduces profits and at times may increase losses. Public companies also lose on productivity because more resources are dedicated to compliance rather than profitable activities. Middle-sized public companies have opted for actions such as stock splitting to reach levels below which the standards are not applicable so as to be free from this legislation. Alternatively, other companies have opted to de-list from the stock market to avoid expenses off implementation. Smaller companies have also been unable to recruit enough people qualified to act as board members to meet independence requirements (Warren, 2008).
The act has brought in higher levels of integrity in public companies and increased investor confidence. However, it has increased operation costs and led to reduced revenues. In a personal opinion, I would state that the acts’ legislation is in good faith, but it should reviewed and streamlined to reduce the adverse effects it has on middle and small-level public companies. However, it should be agreeable upon to state that the government has done the best it can to protect investors, and this act is a good action with a good intention that is not harsh or overboard.
References
Bergen, L. (2005). The Sarbanes-Oxley Act of 2002 and its Effects on American Businesses. College of Management Forum: Financial Services Forum. Umass Boston. Retrieved from http://www.financialforum.umb.edu/documents/Sarbanes-Oxley.pdf, on 30thAugust, 2010.
Warren, S.C. (2008). Survey of Accounting, fourth edition. Cengage Learning.
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