One reason for its significance is its scope along with the material shift it signifies in the balance of federal and state regulation of corporations. Historically, substantive regulation of corporate procedure and governance has been primarily the province of state regulation, while the federal securities laws have regulated disclosure. (Klimko, May 2004)
Second reason is that SOX seeks to improve investor confidence by tightening government regulation of the accounting, reporting, and corporate governance practices of public companies. Many of the Act's provisions require the SEC to adopt implementing rules, and many rules have been adopted since the Act became law. (Klimko, May 2004) In this respect positive changes are recorded in corporate auditing controls and compliance procedures.
The Act also established the Public Company Accounting Oversight Board to regulate accounting firms who perform audits on the financial statements of publicly held companies. The board's mission is clear: to tighten accounting standards and restore confidence in the profession. Subject to direct SEC supervision, this body also is responsible for disciplinary action--everything from investigation to significant fines--against any company found in noncompliance with the Act. (Longnecker, 2004)
As is generally the case with governmental intervention in the affairs of business, Sarbanes-Oxley has triggered many unintended side effects. Most experts agree that it has changed several facets of business, including the concept of the executive seat; the way honest, hard-working CEOs interpret their roles; and the methods scandal-weary boards use to operate and make decisions moving forward. (Longnecker, 2004)
Further, the uncertainty surrounding the legislation's impact on auditing, financial reporting, executive loans, etc. has had a chilling effect on operations in boardrooms across the U.S. Leading decision makers at companies are, in many cases, so intently focused on legislative issues that they have been distracted from fully focusing efforts on their business' primary operations and creating shareholder value. Additionally, it is not just the CEO and CFO who are being asked to certify financial records and take on additional risks and responsibilities. Although not specifically mandated by Sarbanes-Oxley, many companies are requiring certifications of financial results by their division presidents, department heads, and other senior management in an effort to comply with corporate governance and controls. As the process continues to filter down through the ranks, simply conforming with these laws could end up costing shareholders more than they ever thought possible. In essence, the ripple effect of Sarbanes-Oxley very easily could take businesses from a place of under regulation to one of overregulation, which can be just as dangerous for a variety of reasons. (Longnecker, 200