Once upon a time ("Sox-online," 2013), in a land great there lived the mighty Enron. But Enron

died and the people of the land were sad and confused, so they consulted the wise and powerful

Arthur Anderson. But, Anderson lied to the people of the land and said that everything was good.

Then “good” changed to “bad.” The people cried out to the King of the land, and the king

passed a law that kept the mighty from becoming powerful by cheats and fraud and the people of

the land were happy until the King’s law became a monster and turned good into bad because

the monster could not be tamed.

Sox-online. (2013). Retrieved from http://www.sox-online.com/

On October 29, 1929, frantic stockholders began selling their stocks because stock prices

were falling precipitously. The New York Stock Exchange crashed, fortunes were lost, and the

day became known as Black Tuesday. The following Depression was one of the worst financial

disasters in American history. The Securities and Exchange Commission was established in

1934 to regulate the commerce in stocks, bonds, and other securities. Circumstances change

throughout history, but the greed and corruption of man stay the same; therefore, the Sarbanes-‐

Oxley Act, officially named the Public Company Accounting Reform and Investor Protection

Act of 2002, became law on July 30, 2002, to address the corruption and greed of a new era.

Although Sarbanes-‐Oxley opened a floodgate of philosophical debate regarding its impact on

American businesses, the law with its overreaching regulations has affected business decisions,

created certain legal challenges for businesses, and set forth a wide range of criminal penalties

for noncompliance businesses.

According to the Harvard Law School Forum on Corporate Governance and Financial

Regulation ( Bargeron, 2009) and a study conducted in 2009, which was published in the Journal of Accounting

Economics and entitled, Sarbanes-‐Oxley and Corporate Risk-‐Taking, “Several measures of

corporate risk-‐taking changed significantly after SOX was signed into law in 2002 for publicly

traded U.S. companies as compared with non-‐U.S. companies not bound by SOX. The evidence

is most consistent with the view that SOX has discouraged risk-‐taking by U.S. companies.”

Bargeron, L. (2009, June 24). [Web log message]. Retrieved fromhttp://blogs.law.harvard.edu/corpgov/2009/06/24/sarbanes-oxley-and-corporate-risk-taking/

Before this study was published, scholars and business pundits speculated whether

Sarbanes-Oxley had restricted U.S. Corporations from taking necessary risks to advance free

enterprise. For example, Bloomberg and Schumer (Sussman, 2006) in an opinion piece of the

Wall Street Journal called for “decreased regulation of the financial services sector.”

Bloomberg and Schumer attacked the regulatory climate in the America particularly Sarbanes-‐

Oxley, which they criticized for its high cost to business. They called enforcers of the

regulations “overzealous,” warning that failure to cut back regulations will have dire

consequences. Bloomberg and Schumer ( S u s s m a n 2 0 0 6 ) , recommend that the U.S. adopt

a lighter regulatory system, similar to that seen in countries like England. Notwithstanding

active discussion, one fact remains: Business in the U.S. is no longer the same as far as

decisions, even ethical are made.

Sussman, P. (2006, November). [Web log message]. Retrieved fromhttp://www.remappingdebate.org/article/sec-always-playing-catch?page=0,5

Legal Challenges

One of the legal challenges of Sarbanes-Oxley on businesses is the law regarding mandatory

audits. According to a report in the CPA Journal (Gifford 2004), “as accounting firms reassess

their business strategies, some companies may experience difficulty in securing audit services,

while others may find the audit bill to be unaffordable.” As they did in the 1990s during the

profession’s litigation crises (Gifford 2004), accounting firms may walk away from high- risk

clients. Some firms have threatened to drop audit clients that refuse to pay fees that offset

these higher costs. Accordingly, a number of companies may choose not to go public because

of the reporting and compliance costs associated with Sarbanes-Oxley. Tellingly, some public

companies are currently opting to go private. Foreign firms may decide—as did Porsche—not

to list shares in U.S. markets. Any of these decisions will limit access to the capital markets

and, ultimately, restrict economic growth.

Gifford, R. (2004, June). Regulation and unintended consequences:thoughts on sarbanes-oxley. Retrieved fromhttp://www.nysscpa.org/cpajournal/2004/604/perspectives/p6.htm

Penalties of the Law

According to Section 802(a) of the Sarbanes-‐Oxley Act (Gifford 2004), any individual in a

corporation who knowingly manipulates or falsifies accounting data or who fails to keep

accounting reports compliant will be fined or imprisoned for up to 20 years. The penalties for

being noncompliant can multiply when corporations attempt to retaliate against witnesses or

"whistleblowers." Individuals who inform the Public Company Accounting Oversight Board of

noncompliance are protected under Sarbanes-‐Oxley, and individuals who retaliate against

these individuals are subject to up to 10 years in prison. The Securities and Exchange

Commission (SEC) (Gifford 2004) is responsible for enforcement of the penalties for

noncompliant annual accounting reports. According to the SEC, the government gained several

new authorities under the provisions in Sarbanes-‐Oxley, including the authority to distribute

civil penalties to investors who were harmed by corporations, the authority to censure brokers,

dealers and investment advisors involved in potential noncompliance and the ability to access

all work papers of compliance audit firms.

Conclusion

Although Sarbanes-‐Oxley opened a floodgate of philosophical debate regarding its impact on

American businesses, the law with its overreaching regulations has affected business decisions,

created certain legal challenges for businesses, and set forth a wide range of criminal penalties

for noncompliance businesses. Accountability is paramount to curtail the unruly nature of man,

but without ethical priorities governing the beast in man more regulation does not appear to be

the answer. As Sir Isaac Newton discovered, to every action there is an opposite and equal

reaction. Everything has consequences, even well meanings regulations. The challenge for

economics is to strike the balance.