Question

Advantages and disadvantages of the Sarbane-Oxley Bill and the Dodd-Frank Bill

Answer 1

Solution:-

The Sarbanes-Oxley Act (SOX) was enacted to protect investors from potential fraudulent accounting by companies, whereas the Dodd-Frank Act was passed to enact significant financial reform to reduce risk in certain areas of the economy. SOX was passed by Congress in response to large corporate accounting scandals at Enron, Tyco International and WorldCom that were uncovered in the early 2000s. Dodd-Frank was enacted in response to the 2008 financial crisis.

The Sarbanes-Oxley Act

SOX mandated a number of reforms relating to increasing corporate responsibility, more transparent financial disclosures, and to protect investors against corporate and accounting fraud. Section 302 of SOX requires that management certify the information contained in financial disclosures. Section 404 requires corporate management and their auditors to maintain internal controls with appropriate reporting methods.

Fraudulent accounting scandals caused large and complex bankruptcies for Enron and Tyco. These scandals put thousands of people out of jobs and cost stockholders billions in share value.

The Dodd-Frank Act

Dodd-Frank required significant reform in areas of regulatory regimes, swaps trading, derivatives valuation and corporate performance pay. Many believe the financial crisis was caused in part by issues with swaps trading in credit default swaps and mortgage-backed securities (MBS). These exotic financial derivatives were traded over the counter, as opposed to on centralized exchanges as stocks and commodities are. Many were unaware of the size of the market for these derivatives and the risk they posed to the greater economy.

Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and also required greater disclosure of swaps trading information to the public to increase transparency in those markets.

Advantages and Disadvantages of Sarbanes-Oxley Act

Advantages

1. It holds companies responsible for their actions.
In the past, public businesses weren’t required to be very transparent with the general public. Even shareholders at times would have a difficult time getting the information they needed about their investment. By requiring clear accounting practices and defining ethical transactions, there is a clear outline that businesses must follow in order to provide transparent services.

2. It forces public companies to provide due diligence materials.
Even when potential investors would call for accounting spreadsheets or future outlooks, a company didn’t have to provide accurate information. They could instead provide summaries or outlines that helped to support the benefits of an investment even if they were phantom benefits. The 2002 law stopped this practice from happening.

3. It holds those who create the financial information personally responsible for their actions.
Executives in the past were often not held personally or criminally accountable for their actions in misleading consumers and shareholders. The Sarbanes-Oxley Act changed that because it outlined what steps executives and other employees would need to follow to avoid being held responsible for the inaccurate information that they may be reporting.

4. It restored consumer confidence.
Because any potential negative impacts had to be evaluated and published by companies, it gave investors an easy way for them to perform their due diligence before making an investment. This helped to restore some of the trust that investors had lost in public businesses during this period of time because of all the false information that had been offered instead.

5. There are better internal control environments.
Better internal controls lead to the development of more accurate information. With accurate information, better planning and investing can happen in the short- and long-term perspective.

Disadvantages

1. It increases the cost of doing business.
With added regulatory control comes higher administration costs. Most businesses aren’t just going to eat the higher costs when they occur. They’ll raise the price of the goods or services that they are providing instead. It isn’t the business that ultimately pays for better regulatory control and added individual responsibility. It’s the customers of that business and its shareholders.

2. It offers unclear loopholes that may not solve any problems.
The Sarbanes-Oxley Act requires companies to develop their own system of “personal” responsibility. This means that every company must create their own specific guidelines from the generic structural outlines that the law provides. If the accountability system implemented is found not to conform to standards, then the consequences handed down to the business could be just as severe as if they’d misled people in the first place.

3. It limits economic opportunities.
When people are forced to spend more on the goods and services that their lifestyle demands, it means there is less money available for other things that are enjoyed. If a household has $200 to spend and their wireless bill goes from $100 to $135 to compensate for the requirements of the Sarbanes-Oxley Act, then that’s $35 that is potentially being taken out of the local economy.

4. It increases auditing fees for everyone.
Because Federal auditors are required to look at items in great detail, it takes more time for them to complete the process. This affects all companies because it affects the auditing fees that are required for all businesses. It happens even when it is a small private businesses that is not subjected to the Sarbanes-Oxley Act. The model is slow, expensive, and designed more for large organizations and that slows down the pace of business.

5. Even the government can’t get things straight.
The SEC and the PCAOB (Public Company Accounting Oversight Board) don’t agree with what needs to be reviewed or how to make the process more efficient.

Advantages and disadvantages of Dodd-Frank Bill

Advanatages

1. Greater Collection of Data

2. Transparency of Swaps

3. Creation of a Consumer Protection Service

4. Planning for Failure

5. Increased Capital Reserves

Disadvantages

1. Unregulated Shadow Banking

2. The Prospect of Inconsistency

3. The Quality of Supervision

4. Weak Corporate Governance