Rationale Behind Passage of the Sarbanes Oxley Act Essay

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1. If jail time is off the table for executives, that would be an odd choice. Sarbanes Oxley creates disincentives for esecutives to commit fraud, such as in Enron. The point of SOX was really to add extra regulatory teeth, added punishments for executives committing fraud, under the knowledge that most major fraud is committed with the approval of executives, or driven by them. Folks lower down don’t have the access, nor the equity-based compensation packages, that would motivate or facilitate fraud without senior executive knowledge or initiation. As such, a law that takes jail time off the table would be pointless, as the incentives to commit accounting fraud are largely financial in nature, and therefore any punishment that simply involves fines or forfeiture of assets will invariably end up with a punishment lower than the proceeds of the crime. The point of jail time is to provide a deterrent that actually matters for wealthy individuals – loss of their freedom. Without that, the law is not going to be effective.

2. The UK has taken so long to implement its own version of SOX mainly because it didn’t have the high profile fraud cases that drove the creation of SOX. In other words, it wasn’t a priority.

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The Sarbanes-Oxley Act was written after a series of accounting/fraud scandals had occurred in short succession, to such a degree that public confidence in the capital markets was under threat. Sarbanes-Oxley was implemented to restore investor faith in American capital markets, and it served that purpose. The scandals that rocked the US, however, did not for the most part affect the British markets. Most British investors did not have any reason to feel that their confidence in the UK’s capital markets was under threat. As such, there was no crisis, and without that crisis there was no particular political will to implement any such similar law in the UK. Why this is being considered today is really because of a couple of recent issues, Carillion and BHS, which have now created a similar political motivation in British political circles as existed in the US when the Sarbanes-Oxley Act was passed.
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