Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of Sarbanes-Oxley on the Fasb and Accounting Regulation

Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of Sarbanes-Oxley on the Fasb and Accounting Regulation

Article excerpt


The Sarbanes-Oxley Act (SOX) was signed into law on July 30, 2002, at the time it was labelled "the most far reaching reform of American business since the time of Franklin D. Roosevelt (Bumiller, 2002). SOX were enacted following a period of high-profile corporate scandals that exposed the corrupt accounting practices of some of the largest companies in the United States. These scandals and related regulatory failures contributed to a loss of public faith in the accounting profession and the agencies responsible for regulating it.

The passage of SOX was intended to restore investor confidence and trust in the accounting profession and to improve previously flawed areas of the regulatory process. Some of the major changes included the creation of the Public Company Accounting Oversight Board (PCAOB), Section 404 increases to internal controls, whistle-blower preventions, increases in personal liability for CEOs and CFOs and revisions for the accounting treatment of certain complicated financial entities (Special Purpose Entities) and accounting methods (Mark-to-Market) (SOX, 2002). Previous literature has assessed the economic consequences of the legislation and documented how SOX influenced the behaviors of publicly traded companies, CEOs, Boards of Directors, public accounting firms, users and other constituent groups (Li, Pincus and Rego 2006, Zhang 2005, Berger, Li and Wong 2005, Coates and Srinivasan 2014, etc.) To date, no study has examined the impact of SOX on the accounting regulators or the regulatory process itself. This paper contributes to the literature on the changes that have been realized via SOX by focusing on the Financial Accounting Standards Board (hereafter FASB or the "Board") and the accounting standard setting process.

Given the extent of the legislative overhaul, it is important to understand how SOX affected all parts of the regulatory process, including the work of the accounting regulators and the regulatory process itself. Improving the accounting and financial regulatory systems continues to be an on-going topic in the US, as evidenced by more current legislation, including the Dodd-Frank Act and the Financial Choice Act (currently in-process). The Dodd-Frank Act, passed in 2010, focuses on financial services and banking, but also includes requirements to improve transparency in financial reporting. Most recently, the Choice Act, passed in the House of Representatives in June 2017, proposes changes to the existing regulatory structure of the financial system, aiming to improve accountability and transparency. In addition to the creation of new regulatory agencies, changes to existing accounting regulators are proposed, including the Securities and Exchange Commission and the Public Company Accounting Oversight Board. Although it is still in the legislative process (and unlikely to be passed in its current state) the Choice Act underscores the desire for more regulatory reform in the areas of accounting, financial reporting and corporate governance.

By analysing the effects of SOX from a previously unexamined perspective, this paper serves to augment the existing regulatory literature as well as enhance our understanding of some of the lesser-studied aspects of the legislation. The analysis provides guidelines and raises additional questions for future research in this area.


Sarbanes-Oxley Act

SOX were devised to rehabilitate investor confidence after the highly publicized financial frauds of the early 2000s. These scandals exposed weaknesses in the existing corporate governance systems and self-regulatory mechanisms of the accounting profession and created doubts about the ability of these systems to communicate reliable financial information to the market. As a result of these shortcomings, a number of major objectives were included in the SOX legislation to create and enforce a system of checks and balances, including strengthening the independence of auditors, improving the quality and transparency of financial statements and corporate disclosures, enhancing corporate governance, improving the objectivity of research and strengthening the enforcement of the federal securities laws (SOX, 2002). …

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