Question

Please concisely answer the following questions on Sarbanes-Oxley and Dodd-Frank.

1. Describe each Act, their major components and their impacts.
2. Why did Congress pass each Act?

3. Describe the issues these Acts have solved and the problems they have caused.

4. Should Sarbanes-Oxley and/or Dodd-Frank be modified, repealed, replaced, or left alone? Support your answer.

Answer 1

1.

Sarbanes - Oxley Act.:

The Sarbanes Oxley Act was enacted by the congress for the purpose of protecting investors and external parties from fraudulent and misleading accounting done by companies. This act was passed due to large number of corporate accounting scandals that has emerged in the early 2000’s.

Its major components includes setting up of PCAOB (Public company accounting oversight board) to give a independent view about the accounting aspects of public companies. The act added 9 sections to enhance auditor’s independence. Some other main components were ‘corporate social responsibility’, ‘enhanced financial disclosures’ , ‘corporate fraud accountability’ etc.

The act had a considerable impact on corporate governance and corporate accounting in an effective way. The act has strengthen audit committees of public companies. Management are made more responsible for the accounts and financial reports of the company in longer run. It has enhanced disclosure requirements of companies.

Dodd - Frank Act.:

The Dodd Frank Act was passed as a measure to do significant reforms in financial sector. The main causes of financial crisis were regarded credit default swaps and MBS or mortgage backed securities. The act was passed with an aim to make these financial instruments more transparent. This enhances investors trust in the market and on these instruments back again.

The major components of this act was ‘The Volcker Rule’ this rule ensured that banks stay away from speculative trading activities for making profits. Set up of ‘The Consumer Financial Protection Bureau’ to keep an eye on consumer finance markets like student loans, mortgages, credit card etc.

The impact of this act was also significant, financial markets has seen stability along with enhanced consumer protection from financial frauds and mistreatment by financial companies.

2. The Sarbanes - Oxley Act. was passed with an aim to enhance the accounting of public companies and the frauds involved therein, while the Dodd - Frank act was passed with an aim to enact better and effective financial reforms and to reduce risk in different areas of the economy.

3. As discussed the Sarbanes - Oxley Act. has solved many issues like misreporting and potential fraudulent accounting by companies. It has improved corporate governance by making management directly responsible for the financial statements and internal controls of the company. Sarbanes - Oxley Act. has made public accounting and disclosure requirement a bit more stringent which has imposed extra burden on the management and thus any aggressive action by the management can put them directly under the scanner. The Dodd - Frank Act. has solved issues related to consumers in the consumer financial market along with bringing stability within the financial markets after the 2008 crisis. The problems this act may have caused is that it has harmed the competitiveness of US public companies over its global competitors due to stringent regulations.

4. Certain sections of both the acts can be modified in order to make them more relevant for the current competitiveness in the global marketplace. Higher level of restrictions in accounting and financial statements applied by Sarbanes - Oxley Act. makes difficult for companies to operate competitively. There is no such requirement to repeal these acts as these have strengthen the corporate governance of companies in an effective way.