Question

What you think about the changes made to corporate governance rules since the implementation of the Sarbanes–Oxley Act of 2002. Based on that, formulate an opinion on whether or not these changes are sufficient in preventing financial fraud.

Answer 1

Since the implementation of the Sarbanes-Oxley Act there have been some changes to the corporate governance rules which are as follows:

1. One effect of the Sarbanes-Oxley Act on corporate governance is that it is responsible for the strengthening of public companies' audit committees wherein its members function independently of the management and are in the responsible position of approving various audit and non-audit services, , selecting and supervising the external auditors, and handling complaints concerning the management's accounting practices.
2. The effect of Sarbanes-Oxley Act on corporate governance is that the Sarbanes-Oxley Act significantly strengthens the disclosure requirement. Public companies must disclose any material off-balance sheet arrangements, like the operating leases. The company is also required to disclose any pro forma statements and how they would be seen under the generally accepted accounting principles (GAAP). Insiders are required to report the stock transactions undertaken to the Securities and Exchange Commission (SEC) within two business days as well.
3. The effect of Sarbanes-Oxley Act on corporate governance is that the Sarbanes-Oxley Act established the Public Company Accounting Oversight Board, which promotes and makes public standards for public accountants, limits their conflicts of interest and also mandates that lead audit partner rotation every five years for the same public company
4. The Sarbanes-Oxley Act has impacted the corporate governance as it has encouraged companies to make their financial reporting more efficient, centralized and automated.

These changes brought in by Sarbanes-Oxley Act have not been extremely successful in preventing the financial frauds as explained below:

1. The various Rules formulated under Sarbanes-Oxley has created an expensive paperwork exercise for companies. They have a huge overload of documentation on what and how the company does in regards to financial data and its operations.but there is no ample evidence to show that the documentation itself has been responsible for preventing frauds.
2. In many respects, Sarbanes-Oxley Act was enacted so that the companies take steps to proactively prevent and detect fraud., But in the rush to come up with something to pacify investors and the general public it failed in the detailing aspect. The law really required detailed documentation of procedure but it ended up being a feel-good legislation . Therefore it didn’t have the required impact to reduce the frauds
3. Sarbanes-Oxley Act didn’t impact the organization in terms of reducing the frauds as very few companies took proactive fraud prevention efforts. So it has not been that successful in reducing the frauds.