The Sarbanes-Oxley Act and Fraud
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Describe the main aspects of the regulatory environment which will protect the public from fraud within corporations. Pay particular attention to SOX requirements.
- Specifically evaluate whether SOX will be effective in avoiding future frauds.
- Format consistent with APA guidelines
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Solution Summary
Sarbanes-Oxley is irrelevant and even a positive development for the larger companies in corporate America. SOX (for short) serves to increase punishments for unethical behavior. The problem is that such behavior, driven by short-term thinking, is economically rational in an uncertain market. Further, the costs that must be incurred by the Justice Department in enforcing this are prohibitive, especially against companies 10 times the size of the SEC.
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SOX both enhances the regulatory framework that already rules the accounting procedure of corporations and adds a bunch of new penalties. Records must be maintained with tremendous rigor. The real issue is that the firm becomes its own policeman, which is why the SOXley act was a failure. It dealt with the Enron scandal, but just a few years later in 2007, a new round of corporate fraud began with the housing debt bubble.
Transparency is meant to be the main pillar of SOX. To have a private firm do the books is strongly encouraged, but the collusion between the two sectors was at the root of the 2007 disaster. Self-interest does not translate into the public good. This is clear enough, since the fraud of both 2001 and 2007 was based on self-interest and short-term thinking.
Firms are to have an "Audit Committee" with a huge degree of independence, and functions separately from the drive for profit, which is what these firms are for. Concealing evidence from the SEC is increased in terms and fines. Hiding evidence or profiting from fraud are more severely punished.
All public firms are required to maintain a workplace democracy: all workers should he quickly able to voice grievances to the firm. No retaliation is ever permissible for the firm against a worker complaining about illegal or unethical practices.
In essence, the concept is to separate the risk assessment from profit. Those profiting from an investment cannot be the ones evaluating it. But corporate America does NOT separate these things, so SOX was a dead letter and constantly in court anyway. Enforcement is impossible against companies ...
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