To Be or Not to Be Public: The Impact of SOX

By Rosenthal, Leonard; Gleason, Kimberly C. et al. | Quarterly Journal of Finance and Accounting, Spring 2011 | Go to article overview

To Be or Not to Be Public: The Impact of SOX


Rosenthal, Leonard, Gleason, Kimberly C., Madura, Jeff, Quarterly Journal of Finance and Accounting


Introduction

In the midst of the greatest economic/market meltdown since the Great Depression, the U.S. government has enacted a number of new laws/regulations to address the problems that played a role in the current crisis. Some commentators and others say that we should avoid rushing to put new rules in place as was done with the passage of the Sarbanes-Oxley Act (SOX) of 2002--which was passed on the heels of several major financial frauds which came to light in 2001 and early 2002. SOX is the most dramatic piece of legislation relating to shareholders and corporations since the 1930s.

The Sarbanes-Oxley Act, signed by President Bush on July 30, 2002, contains provisions that are intended to ensure more accurate disclosure of financial information to investors. The Act:

1. Empowers a public company accounting oversight board to inspect accounting firms. The accounting firms are charged an annual fee, and are assessed by the board every one to three years. (Section 1)

2. Allows public accounting firms to offer non-audit consulting services to an audit client only if the client's audit committee pre-approves the non-audit services to be rendered before the audit begins. (Subsection 201)

3. Prevents a public accounting firm from auditing a client firm whose CEO, CFO, or other employees with similar job descriptions were employed by the audit firm within one year prior to the audit. (Subsection 206)

4. Requires that the firm uses an independent audit committee, which consists of only outside board members, and one of those members must be a financial expert. (Subsection 301, Subsection 407)

5. Requires that firms with at least $75 million in assets that file 10-Ks improve their internal control systems (this provision was implemented as of November 15, 2004). (1, 2) (Subsection 404)

6. Requires that the CEO and CFO of firms that are of at least a specified size level certify that the audited financial statements are accurate, and holds them accountable for their verification. (Subsection 302)

7. Requires more timely and enhanced disclosure of the financial statements, (especially for off-balance sheet items). (Subsection 401)

8. Specifies major fines or imprisonment for employees who mislead investors or hide evidence. (Sections 8, 9 and 11)

9. Provides for the forfeiture of bonuses if financial statements are restated. (Subsection 304)

10. Eliminates personal loans. (Subsection 402)

All provisions listed above are intended to prevent fraudulent financial reporting, and increase the transparency of publicly-traded firms. However, some critics argue that SOX imposes a large penalty on publicly-traded firms by increasing the cost of disclosure. As a result of SOX provisions, publicly-traded firms are subject to larger audit fees, and higher costs of maintaining the required internal financial controls. Consequently, its provisions may have motivated firms to go private rather than incur the explicit and implicit costs of complying with the law's requirements. We investigate this issue by examining whether SOX affected the propensity of firms to go private, and the effect of SOX on valuation of firms going private.

Our study contributes to the literature in the following ways. First, we use a more focused definition of going private than previous related studies (discussed shortly), in which we examine firms whose shares no longer trade in any market and which no longer provide publicly available financial information. Therefore, we exclude firms that deregister ("go dark"). We think that our definition of going private provides the cleanest way to assess whether SOX encourages public firms to go private. Second, our sample is extended through 2005 so that we can assess a longer time period following SOX. This is relevant because of shift in the possible increased incentive to go private since SOX and the possible extra reward (valuation effect) for firms that have gone private since SOX. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

To Be or Not to Be Public: The Impact of SOX
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.