SOX Act Slows Down Financing Term Paper

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SOX Impact on Corporate Financial Reporting

The Sarbanes-Oxley Act of 2002 (SOX) led to widespread changes in how governance, risk, compliance, financial reporting and decision-making are managed in publically-held coproratio9ns today. Experts in the field of governance and compliance have concluded that the SOX Act immediately redefined the scope of financial reporting and risk definition (Hagerty, 2006). This was especially prevalent in the bond markets, where forcing greater disclosure of financial performance and material events including Section 404 of the Act (Sarbanes-Oxley Act, 2002) led to more oversight of just how bond debt instruments were structured and implemented over time (Boubakri, Ghouma, 2008). The net effect of the SOX Act continues to be seen today with positive and negatives changes to corporate financing taking place, and they are analyzed in the following section.

Positive and Negative Changes to Corporate Financing from the SOX Act

The SOX Act was deliberately written to be non-prescriptive as previous legislation that had been highly prescriptive in nature failed to stop widespread corporate financial fraud as exemplified by Enron, Tyco, WorldCom and many others (Engel, Hayes, Wang, 2004). Being deliberately on-prescriptive in defining the core components of the Act gave Congress the flexibility of a more precise definition of the most critical sections to corporate governance, risk and compliance (GRC) as they relate to corporate finance. These sections include the following, and each has a significant role in defining the current and future role of corporate finance within publically-traded companies listed on American-based stock exchanges:

Section 302: Corporate Responsibility for Financial Reports

This section of the act require that firms be proactive in how they define their audit, verification and corrective action/preventative action (CAPA) workflows to ensure traceability and clarity (Engel, Hayes, Wang, 2004).

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Follow on studies have shown the strengths of requiring audit and verifications have a complementary effect on bond performance and the ability of enterprises to anticipate demand for specific bond issuances (Boubakri, Ghouma, 2008). Another advantage of this specific section is that it forces a high level of standardization throughout an entity to ensure consistency of audit performance. This saves a significant amount of time and reduces confusion while streamlining the periodic reporting now required as part of the Act (Hagerty, 2006). A third positive change of this section is that it also provides investors with a much clearer focus of how companies offering securities are managing variations in specific reporting requirements, which ties to Section 404 (Engel, Hayes, Wang, 2004). Downsides of this section include the additional cost required to put systems in place that can manage the overall workflows. There is also the educational time and system costs for implementing corrective acitio9n systems and reporting standards (Hagerty, 2006). Third, change management is often the most difficult area of all….....

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