Student Imed Baghdadi
Business Economics GM 545
Professor: Ramiro Serrano

Question #15 Chapter 7 the Sarbanes-Oxley Act of 2002
One of the primary aims of the Sarbanes-Oxley Act of 2002, the New York Stock Exchange, and the NASDAQ corporate governance proposals is to improve the reporting systems for publicly traded companies. Many of the exchange proposals redefine the composition and duties of firms' boards of directors and their compensation and nominating committees. Sarbanes-Oxley places new duties on audit committees and provides oversight and restraints on public accounting companies.
Recent financial reporting scandals and the loss in market values weakened shareholder confidence in the financial accounting system. In response, the NYSE and the NASDAQ proposed increasingly stringent independence requirements, both for overall board membership and for the compensation and nominating committees. Congress passed the Sarbanes-Oxley Act, a group of amendments to existing securities laws intended to strengthen corporate governance and the financial reporting system. These proposals and laws augment existing exchange requirements for listed firms to have independent audit committees.
When costly internal regulations that are not necessary for honest corporations are imposed on all corporations that are competitors, honest corporations do not gain a competitive advantage over those who have violated the law. In some situations these honest corporations could bear higher costs than do rogue corporations. Who then benefits from such rules? First, standardized rules make it easier for the regulators to supervise the corporate subjects of the regulation. Regulators include not only government regulators and examiners but also the internal police within large organizations-that is, compliance officers, comptrollers, and accountants. Second, generally applicable rules that relate to accounting principles make it easier for investors to compare the financial statements of various corporations. This, as well as general accounting rules that apply to all corporations, might strengthen public trust in the information that corporations offer the public. Third, general rules provide a level playing field for competitors. These reasons demonstrate the benefits of rules that apply uniformly to all relatively similar actors. However, in certain contexts, general rules impose high costs on honest corporations, as discussed below. In these circumstances the rules may reduce, if not eliminate, the benefits of general rules that apply to all.
Disadvantages of regulations that apply to all corporations are both over-inclusive and under-inclusive. Corporations may have particular and different problems that general regulations fail to address, especially if the regulations apply to the internal processes of the corporations. Whether a regulation is effective depends on the nature of the corporation and its history as well as the regulation itself.
The Act has increased the Costs of Compliance and has had a negative Effect on Small Companies. From 2001 to 2003 the annual cost of being a public firm for small public companies (those with annual revenues of less than $1 billion) increased 130% to $2.86 million. For larger companies (those with annual revenues of more than $1 billion) the cost increased to $7.4 million. Those costs have affected revenues and, of course, corporate profits. In addition, the aggregate corporate costs of compliance were projected to be $5.5 billion in 2004 $6.1 billion in 2005, $8.4 billion in 2006, and aggregate compliance costs for SOX and other regulations, with the cost of technology, could have risen to $38 billion in 2006, and rise even higher in 2007.
Even privately held companies must comply with the Act if they position themselves to be acquired. Because of the Act, small companies are less inclined to go public. They might reduce their hiring because of the costs associated with compliance that comes along with increased size. But can we see the NYSE or the NASDAQ will merge with another stock exchange?
In response, one study concluded that "on the day Sarbanes-Oxley was signed, the market value of the Wilshire 5000 index-a proxy for all public companies in the U.S.-stood at $10.5 trillion. At the end of June, the Wilshire was worth $16.14 trillion, an increase of 54%." "To say that's all [due to the Act] would be just as specious as some of the criticism of the Act. But to deny that the restoration of confidence it brought had any impact would also be inaccurate.
The survey of 105 investors and analysts found that in Asia, where awareness of section 404 was lowest, and 92 per cent were likely to steer away from shares in companies that reported deficiencies. The NYSE and the Nasdaq may understand that Sarbanes-Oxley could produce considerable short-term market confusion before its benefits in terms of improved transparency emerge but will not merge with another market for the same reasons because The U.S. Sarbanes-Oxley Act of 2002 can help re-establish a culture of honesty within corporations by continuously reminding management of the need for honest, forthright behavior, as well as legal compliance and honest accounting as part of its decision-making processes. However, the Act applies to honest corporations and to institutions that are highly regulated such as banks, insurance companies, and investment companies. The Act's requirements are costly, and are imposed on all corporations, whether rogue or honest. The Act does not reward honest corporations by a competitive advantage, and robs them of their ability to advertise that they have behaved well. In addition to preventing corporations from competing through fraud, and changing the culture of rogue corporations, corporate criminal law should also provide rewards for maintaining an honest corporate culture.

References:
Act could have unwelcome outcome SARBANES-OXLEY. BARNEY JOPSON and ANDREW PARKER .Financial Times [London (UK)] 30 Mar 2005: 25
Noorishad, Kaveh.The Georgetown Journal of Legal Ethics18. 3 (Summer 2005): 1041-1054