The Sarbanes Oxley Act is a piece of legislation that was enacted in 2002. The legislation was created in response to some of the corporate scandals, like Enron. This act has sparked some debate on whether it is a legitimate and helping the average consumer.
Pros of the Act
One of the big advantages of this act is that companies are being held more accountable. There are specific rules about how the company must handle their accounting practices. The Sarbanes Oxley Act dictates what a company can, and cannot do. This means that the accounting of the company will strive to be more accurate.
With this legislation, investors should have a little bit more peace of mind. Before the act took effect, investors were starting to lose faith in the system. Many companies like Enron and WorldCom had purposely deceived their investors. Investors did not know whether they could trust the information that was provided to them.
The Sarbanes Oxley Act has helped investors feel comfortable with the information that is being distributed. There is always the chance that somehow a company could misrepresent something, but the odds are reduced. The accounting practices, and the individual behind the accounting are held responsible with this act.
Another advantage of this legislation is that the individuals that are in charge of reporting financial information are being held accountable. If they do not do their jobs properly, they will have to face the consequences. The legislation put specific steps in place that have to be followed in order to avoid any type of consequences.
Even though this legislation as a major advantages, there are a few disadvantages. The biggest disadvantage to this program is that it is costly. In order to comply with the rules that are set forth, companies have to pay large sums of money. Even though there are strict rules with this legislation, there is no guidance set forth as to how a company should implement these practices. Every company had to come up with their own system and put it into place. In order to do this, the companies had to spend a great deal of money along the way.
As an investor, this can negatively affect you in the long run. When a company suddenly has a large, new expense to deal with, they are going to have to come up with the money from somewhere. This means that they will be taking money from other areas of the business. This is also going to negatively affect the profitability of the company overall. It could potentially skew several valuation multiples that are used to determine the profitability of a company and make it seem like a less attractive investment. The act is an important step toward achieving transparency, but for companies that are not set-up to provide that, it can be costly.