08 Mar SOX: An Investor’s Supporter, Not Its Enemy
As we soon approach almost 20 years of the Sarbanes-Oxley Act, the debate continues regarding the benefits versus drawbacks this piece of legislation has brought business owners and investors alike. After the earthshaking events surrounding the accounting scandals of the early 2000s, the fact that there has been a relative respite in recent years from similar situations shines a favorable light on how this act has proven to be beneficial. Yet, that has not withheld some corporate executives from voicing their intent on the removal of some elements of the law. Is this truly beneficial?
Companies have been required by law to have effective internal controls over their financial reporting for decades. But a large quantity of them failed to comply, as the scandalous accounting frauds and numerous financial restatements proved. Due to this non-compliance, Congress elected in 2002, as part of Sarbanes-Oxley, to make auditors attest to corporate controls on financial reporting. Despite a company’s possible dislike of these assessments, experts have found the regulation to have highly contributed to the prevention of disastrous accounting frauds.
A study that was published in a journal from the American Accounting Association found that the external auditor requirement on corporate financial reporting is a highly effective warning system for corporate fraud. Another compelling find in the report was that their research indicated that companies with weak financial reporting controls significantly underperform those with stronger setups. Additional related studies confidently highlighted the benefit of the law, pointing out that it reduced the severity of financial restatements and increased investor confidence.
After the implementation of the Sarbanes-Oxley act, financial crime and accounting fraud became much less widespread than before. Organizations were deterred from attempting to overstate key figures such as revenues and net income. The cost of getting caught by the United States Securities and Exchange Commission (SEC) had exceeded the potential benefit that could result from taking liberties with the way that financial documents were presented. Thus, investors benefited from access to more complete and reliable information and were able to base their investment analyses on more representative numbers.
Clearly, investors will be hurt the most if this provision of Sarbanes-Oxley is watered down. For SOX compliance to be beneficial, you need the right team to work with you. FPV & Galíndez understands your organization’s needs and has the track record of excellence to support that. Learn more about how we can achieve SOX compliance for your organization.