Introduction
To establish a standard in corporate governance, the Sarbanes-Oxley Act became law. The act required public corporations to empower audit committees, strengthen internal controls, enhance financial reports’ disclosure, and hold senior directors and officers liable for financial statements’ inaccuracy. Although the SOX passage intended to restore investors’ confidence and strengthen investor protection, it had adverse effects on banking institutions. Sarbanes Oxley Act had many adverse effects on commercial banks because the financial markets were heavily regulated prior to its enactment. Widely criticized are the negative and positive impacts of Sarbanes Oxley Act on commercial banks. The paper analyzes literature that explains how Sarbanes-Oxley Act affected banks and related entities. Commercial banks’ compliance with the Sarbanes-Oxley Act has increased operating costs, reduced incentives to join managerial positions, pushed many community banks out of the stock exchange market, and reduced banking profits.
On the positive side, the Sarbanes-Oxley Act has reduced corporate accounting scandals, increased financial reports reliability, and restored the public’s confidence in the nation’s stock exchange market. Sections 302 and 404 have had the worst impact on commercial banks’ fiscal performance. The impact Sarbanes Oxley Act will have on financial institutions’ earnings is a concern. Comparing the financial performance and SOX will reveal how Sarbanes Oxley Act has affected U.S. capital markets. It will be necessary to provide evidence of the need for the Sarbanes-Oxley Act in order to protect banks institutions.
Literature Review
Sarbanes Oxley Act had broad-reaching consequences for public-traded banks as well as community banks. Commercial banks are impacted by the SOX section 301, 307, and 404. The section 307 stipulates that companies must set up independent audit committees. A minimum of one member should also be financial experts. Section 301 also requires that audit committees employ an external auditor. Section 404 requires that public companies evaluate their internal controls, and produce an annual financial statement. The approval of senior management is required. The SOX provisions are intended to prevent earnings manipulation and place corporate directors under personal responsibility.
Before the law was even passed, however, numerous federal agencies already had heavy regulatory obligations on commercial banks. Federal Reserve Bank, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporations were all subject to laws (Falanga 2006. These regulations aimed to protect financial reports from manipulation and commercial banks had been subject to surveillance. Sarbanes-Oxley Act gave banks more control than they had before.
Falanga, 2006. Falanga, 2006. The supervisory letter highlighted Section 301 and Section 302’s requirements that banks had to comply with. While Section 301 subjected banks to hiring an independent audit committee, section 302 required financial institutions to hire a certifying officer to report any material misstatement in financial books (Borgia & Siegel, 2008). There were provisions in existing banking laws that allowed for the auditing of financial reports as well as the assessment of internal controls.
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