Academic journal article International Journal of Management

Impact of the Sarbanes Oxley Act on Foreign Companies in the United States: An Analysis

Academic journal article International Journal of Management

Impact of the Sarbanes Oxley Act on Foreign Companies in the United States: An Analysis

Article excerpt

The Sarbanes-Oxley Act of 2002 has been the root of much discussion and debate over the past three years. The purpose of SOX was to restore public confidence in the markets after this confidence was weakened by these scandals through various requirements which include, among other things financial reporting requirements and corporate governance expectations. It imposes additional burdens on doing business in an effort to make the firm and its executives more accountable for the corporate governance, business operations, and financial reporting of the company. The purpose of this paper is to present a brief recent history of efforts to regulate corporate governance around the world; present the key provisions of the Sarbanes-Oxley Act of 2002; and discuss the impact of this Act on foreign companies doing business in the United States on their operations and reporting worldwide. The paper concludes with some open-ended questions left unanswered which, over time, will be answered based on the future responses to the Act including whether the United States has attempted to impose its laws in other jurisdictions and whether such attempts are overreaching.

Introduction

The accounting scandals of the recent decade have had a major impact on corporate governance as we knew it, for "when seismic events shake investor confidence in large international corporations, the worldwide landscape of public company governance changes" (Green and Gregory, 2005 p. 48). The fact that a ripple effect can cause a company heart burn and consternation is often overlooked in a climate where globalization has resulted in thousands of public companies doing business in different foreign jurisdictions. The result of this globalizing force is that global firms must research the laws of each jurisdiction in which they do business and retain local experts to ensure compliance. This obviously creates a significant financial burden for firms intending to enter global financial markets.

Sarbanes-Oxley Act of 2002

Corporate Accounting Practices Act, more commonly known as the Sarbanes-Oxley Act of 2002 ("SOX") was passed by Congress on July 30, 2002 in response to the corporate scandals of the late 1990's early 2000 's. Its purpose was to restore public confidence in the markets after this confidence was weakened by these scandals (Green and Gregory, 2005, p. 50). Accordingly, the major provisions of SOX include:

1. The principal executive officer and principal financial officer must certify the financial statements of the company;

2. The company must document its internal control systems;

3. The audit committees of the boards of directors must be composed of independent directors and establish "whistleblower" policies to allow questionable accounting practices to be anonymously reported; and

4. Public companies are to adopt and disclose a code of ethics for its key executives (Green and Gregory, 2005).

SOX also drew upon listing standards of the New York Stock Exchange and National Association of Securities Dealers to establish additional governance and reporting requirements for the firms (See Green and Gregory, 2005, p. 50-51). These additional governance and reporting requirements include: (a) creating more accountability for auditor independence; (b) requiring audits of internal controls in addition to those already required of financials statements; (c) limiting the use of pro forma financial information in various ways; and (d) setting minimum standards for professional conduct for attorneys representing issuers in any way before the United States Securities and Exchange Commission (SEC) (See Cohen, Bronson, Edwards and Stegemoeller, 2004 and Madrid, 2004).

Senator Sarbanes, one of the sponsors of the SOX legislation, was clear in the Senate floor debates of his intentions when lobbying for passage of his proposed legislation. He emphasized "simple principles" which are adopted by the SEC in their final regulations illustrated by Ainsworth (2004) as follows:

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