Corporate Governance has become one of the hottest fields of international company law and economics. Whereas many European countries have chosen self regulatory market based approaches or favour comply or explain provisions, the U.S. government decided to take mandatory legislative actions in the aftermath of various accounting and corporate governance scandals, headed up by Enron and WorldCom. This article explains why most, if not all of the relevant provisions regarding corporate governance, are ill conceived and thus should be withdrawn the sooner the better to prevent future economic harm. The author concludes with an evaluation and an outlook for alternatives.
Abschlussarbeit im Kurs Corporate Governance im Rahmen des LL.M. Studienganges Internationales Wirtschaftsrecht an der Universität Aberdeen, Schottland
Table of Contents
A. Introduction
B. Incidents which lead to the enactment of SOX
C. SOX Corporate Governance Provisions
I. “Inside” disclosure and monitoring provisions
a. Sec. 301 SOX – Public Company Audit Committees
b. Sec. 302 and 906 (a) SOX – Corporate Responsibility for Financial Reports
c. Sec. 402 SOX – Prohibition on Personal Loans to Executives
d. Sec. 806 (a) SOX – Whistleblower protection for Employees of Publicly Traded Companies
II. “Outside” disclosure and monitoring provisions
a. Sec. 201 SOX – Prohibited Activities
b. Sec. 307 SOX – Rules of Professional Responsibility for Attorneys
III. Governmental co-operation and regulation
D. Conclusion
E. References
Objectives & Themes
The paper examines the effectiveness and impact of the U.S. Sarbanes–Oxley Act of 2002 (SOX) in the context of corporate governance. It seeks to determine whether the Act’s mandatory legislative measures provide a genuine solution to corporate fraud or if they represent an ill-conceived regulatory intervention that imposes unnecessary burdens without significant positive effects on market stability.
- Analysis of legislative responses to accounting scandals (Enron, WorldCom).
- Evaluation of internal monitoring mechanisms, including audit committees and CEO/CFO certification.
- Investigation of external monitoring through prohibited audit activities and attorney responsibilities.
- Critical assessment of the role of federal government regulation versus market-based self-regulation.
- Review of the efficiency and economic consequences of SOX compliance for listed companies.
Excerpt from the book
C. SOX Corporate Governance Provisions
Many Corporate Governance provisions that the SOX introduces are not “the invention of the wheel” but rather “recycled ideas advocated for quite some time by corporate governance entrepreneurs”. In order to heal the economic wounds that were caused by Enron et al. SOX mainly focused on “disclosure as the cure”. Better enforceability is grounded on two pillars. Firstly, monitoring, which consists of a system where every party involved monitors the other and is obliged to report violations to SEC, and secondly, punishment by SEC in case of non compliance.
I. “Inside” disclosure and monitoring provisions
Inside control and monitoring mainly focuses on officers and directors and operates in a number of different but related ways. The Board officers monitor employees, the Audit Committee monitors the Board (as well as “outside” auditing firms), and the employees monitor the whole corporation through the help of whistle blowing protection.
a. Sec. 301 SOX – Public Company Audit Committees
Sec. 301 SOX, which is an amendment of Sec. 10A(m) of the Securities Exchange Act of 1934 (SEA) requires all listed companies to have an audit committee, which is entirely composed of independent directors and is supposed to work as a watchdog for the actions taken by the Board. Furthermore the audit committee is directly responsible for the appointment, compensation and oversight of any outside auditor.
The raison d’être of this provision is to break open “club resistance” between the board and the audit committee and thus, by making it a requirement to put solely “outsiders” on the audit committee, to have it act more effectively. However, in dictating that only the audit committee has power to “hire and fire” outside auditors, shareholders are deprived of their right of decision making and the board might run into trouble of realizing their oversight duty. Furthermore, the SOX provision excludes entire categories of experts from the audit committee which leads to a lack of diversity and inflexibility when the business environment changes.
Summary of Chapters
A. Introduction: Outlines the historical context and the shift in U.S. corporate governance from market-based regulation to mandatory federal legislative actions.
B. Incidents which lead to the enactment of SOX: Details the series of accounting scandals and market collapses that prompted the emergency intervention by the government.
C. SOX Corporate Governance Provisions: Critically analyzes specific legislative requirements, categorizing them into inside and outside monitoring mechanisms.
III. Governmental co-operation and regulation: Discusses the overarching role of the SEC and PCAOB in enforcing compliance and overseeing corporate activity.
D. Conclusion: Summarizes the author's argument that SOX may be an unbalanced, rhetorical measure with limited effectiveness that creates unnecessary bureaucratic burdens.
E. References: Provides a comprehensive bibliography of the legal sources, working papers, and academic articles used for the analysis.
Keywords
Corporate Governance, Sarbanes Oxley Act 2002, SOX, SEC, Accounting Fraud, Financial Statements, Audit Committees, CEO/CFO Certification, Whistleblower Protection, Corporate Responsibility, Regulatory Compliance, Market Regulation, Financial Reporting, Economic Crime, Agency Costs
Frequently Asked Questions
What is the central focus of this research paper?
The paper evaluates the U.S. Sarbanes–Oxley Act (SOX) of 2002, specifically questioning whether its mandatory legislative measures effectively address corporate governance issues or if they are counterproductive.
What are the primary themes discussed in this work?
Key themes include the shift from market-driven corporate governance to federal regulation, the analysis of monitoring mechanisms for officers and directors, and the effectiveness of external controls like auditors and lawyers.
What is the core research question?
The author investigates whether the SOX provisions are "ill-conceived" and if they should be withdrawn to prevent future economic harm, evaluating if they offer genuine reform or merely "rhetoric."
Which scientific methods are applied in this analysis?
The research relies on a legal and economic analysis of the provisions, drawing upon existing corporate governance literature, academic studies, and case law to critique the efficacy of the Act.
What topics are covered in the main section?
The main section covers specific SOX sections, including audit committee requirements, executive financial certifications, the prohibition of personal loans to officers, and whistleblower protection protocols.
Which keywords best describe this research?
Relevant keywords include Corporate Governance, SOX, SEC, Accounting Fraud, Audit Committees, and Regulatory Compliance.
How does the author characterize the role of the whistleblower protection under SOX?
The author argues that while intended to assist in uncovering fraud, the protection creates a dilemma for employees regarding loyalty and care, and may ultimately prove ineffective or even harmful to corporate environments.
What is the significance of the "Inside" vs. "Outside" disclosure provisions?
These distinctions categorize how the Act targets internal management (officers and directors) compared to external gatekeepers (accounting firms and attorneys) to enforce transparency.
How does the paper address the impact of SOX on small companies?
The author notes that small listed companies face significant financial and bureaucratic burdens, which may lead them to go private to avoid compliance costs.
What conclusion does the author reach regarding the PCAOB?
The author expresses skepticism, noting that the PCAOB, being largely composed of non-accounting experts, is tasked with overseeing rather than performing the essential forensic accounting work.
- Arbeit zitieren
- Bernhard Kuschnik (Autor:in), 2005, The U.S. Sarbanes Oxley Act 2002. "Big Brother is watching you" or adequate measures of Corporate Governance regulation? , München, GRIN Verlag, https://www.grin.com/document/186138
