Case study 3.

1 USs snow urges balance in SOX page 84

1.

Explain the reasons for the introduction of the Sarbanes Oxley Act (SOA) in the
United States in 2002.

The law was introduced in response to large-scale, highly publicised financial

scandals and subsequent corporate collapses at Enron and WorldCom. These
scandals resulted in the demise of the audit firm (Arthur Andersen who engaged in
questionable professional practices while auditor of Enron).

SOA is a classic example of regulatory intervention by government in the operation

of capital markets in the public interest.

It can also be argued that intervention reflected vote buying: politicians supporting
SOA were acting to restore financial stability and trust.

SOA made changes to directors responsibilities for financial reporting and internal
control and sought to increase the independence of external auditors.

2.

Why are some parties now opposed to SOA? Has their view changed from when the
law was first introduced?

It has become apparent that compliance with Section 404 of the law (which requires
managers to certify about the companys internal control system) is a costly and time
consuming exercise. Law makers may have underestimated the costs of implementing
the section.

Managers who initially supported the introduction of new regulation (because of its role
in restoring confidence in capital markets and thereby improving share prices) may have
become less enthusiastic as the cost of compliance became more apparent.

3.

According to John Snow, what criteria should be considered in determining financial

reporting rules?

Basically, his argument is that rules can have benefits, but they must be carefully
framed so as not to destroy business initiative and confidence. Criteria referred to in
the article include:

(a) rules should not dampen economic growth;

(b) there should be balance in enforcement. Balance means that peoples interests are

protected, but not to the extent that business cannot function efficiently;
(c) rules should emphasise substance over form to avoid penalising people who make
innocent mistakes.