Question

Academia almost universally touts SOX has being good for business and goof for investors. But is that really true? Hasn't SOX imposed additional regulatory burdens on corporations thereby depriving shareholders of additional profits. Was SOX even necessary?

Answer 1

No, this is not true. In fact SOX is good for the interest of the business, its stakeholders and the investors in the long run. The act was introduced with the intention and purpose of protecting investors from the possibility of fraudulent accounting activities by companies and their management. The act has lead to better corporate governance and stringent internal controls within companies.

While the act puts additional regulatory burdens on corporations but it does not really deprive shareholders of additional profits. This is because as stringent levels of internal controls are in place and this leads to proper checks and balances with regards to governance. With proper checks and balances in place shareholders and investors are assured that the company is being managed properly and there are no fraudulent activities or accounting practices that is taking place within the company. This ensures that companies are ‘going concerns’.

It is true that the act leads to additional costs but the benefit that accrues due to the act far outweighs the extra and the additional costs. The act only augments and protects the long term interests of the shareholders and investors.

Yes, SOX was necessary. This is because, at the time the act was passed, there was a glaring need to oversee the financial reporting landscape. Before the act shareholders suffered and lost money in scandals like Enron and World Com. The act was necessary as it would ensure that shareholders are never again misled in future and made to suffer losses due to fraudulent practices of a company’s management.