Week 1 Discussion 2: Corporate Governance

What is corporate governance?  How has the Sarbanes-Oxley Act of 2002 affected it? Explain.

Corporate Governance-Sample Solution

Corporate Governance and SOX

Corporate governance is the system through which the board of directors manages and directs companies (Rezaee & Fogarty, 2020). The board of directors establishes policies that ensure cohesiveness with the company. Notably, adopting the Sarbanes-Oxley Act (SOX) of 2002 significantly affected corporate governance. Rezaee and Fogarty (2020) observe that SOX was implemented to curb scandals that plagued the corporates in the U.S. between 2000 and 2002. It introduced new rules to guide corporate governance, such as requiring companies to strengthen their audit committees, perform internal control, and hold directors liable for all financial statements within their companies. Generally, its adoption has positive and negative impacts on corporate governance. The positive effects include obligating company directors to exercise oversight and ensuring the reliability of financial statements, which helps reduce corruption.(Corporate Governance Essay Example)

Additionally, delegating corporate control to the board also helps curb the embezzlement of funds by ensuring the production of accurate financial reports (Rezaee & Fogarty, 2020). The proper disclosure of financial statements makes it easy for the government and the public to assess company status and performance. Other positive impacts include ensuring corporate social responsibility and ethics, preserving auditor independence, and preventing conflicts of interest within the companies. Consequently, it negatively affected corporate governance by decreasing the shared pool of auditors within the private audit market. This resulted in market shocks that affected private and non-profit companies. Moreover, Rezaee and Fogarty (2020) explain that it reduces the pool of opportunities for auditors since the SOX policies make it difficult for them to practice in public and private companies. Also, it is associated with punitive non-compliance penalties, which puts a financial burden on companies since they must spend enormous resources developing SOX compliance manuals and financial and data control processes.(Corporate Governance Essay Example)