Question

1. Why is Sarbanes-Oxley Act enacted? Give three examples of changes in Sarbanes Oxley Act.

2. If a stock has a beta of 1.50. How do you explain it?

Answer 1

The Sarbanes - Oxley Act was enacted after several companies were involved in scams which resulted in huge losses of the investor money and also a loss of the investors trust. The scandals at Enron, World com, Tyco and Arthur Anderson are a few examples of the scams that have been taken place. These scams have led to losses of millions of dollars and loss of investor trust on the financial markets. This Act imposed a new accountability framework for financial reporting.

Changes in the Sarbanes Oxley Act:

Due to the intense financial reporting standards, the companies were expected to pay a loss of costs to comply with the new law that was just enacted. The act now required fewer costs and it is no longer a burden on the companies to comply with this law. Now, it is a more efficient and stream lined approach. Cost efficiency is what businesses are achieving today after the modification in this Act.

Cyber security was earlier not a part of this Act. With increased adoption of cloud computing, cyber security has become a major concern among companies.

It has continuosly evolved itself to ensure that investor confidence is retained as the top managers have to personally certify the accuracy of the financial statements.

A beta of 1.5 means that the stock is more risky than the market. For example, if the market moves by 1%, then the stock moves by 1.5%. This stock more volatile than the market.