Federal Safeguards: The Sarbanes-Oxley Act

Financial managers are important to every firm, and play a critical role in the profitability and success of every company. Financial managers make many different decisions, face ethical issues, and have to understand and comply with different federal safeguards to ensure there is no fraud or deception. There are also different financial markets and institutions, each with their own advantages and disadvantages.
Financial managers make different types of decisions. These decisions are all aimed at the financial manager’s main goal- to maximize shareholder wealth. Financial managers decide how to use a company’s finances to make investments. These investments help a firm grow, and the investments return profit to the shareholders.

With pressure from shareholders, C-level managers, and others, the financial manager may find themselves in a situation where revenues may be misreported in order to meet goals. In 2002, Xerox was found at fault of prematurely recording $3 billion in revenue, and $1.5 billion in pretax earnings. This misreporting of revenue and earnings was partly due to to having to contend with declining sales and profit (Xerox, 2002).There are multiple federal safeguards in place to reduce financial reporting abuse. One such safeguard is the Sarbanes-Oxley Act, or SOX. The Sarbanes-Oxley Act “holds corporate advisors who have access to or influence on company decisions legally accountable for any instances of misconduct” (Titman et. al., 2011). SOX helps protect shareholders by holding senior executives individually responsible for the “accuracy and completeness of the firms’ financial reports” (Titman et. al., 2011). The Securities Exchange Act of 1934 created the Securities Exchange Commission, or SEC. The SEC brings “hundreds of lawsuits against people for violating securities laws” (Securities, 2014). Like SOX, the SEC helps protect shareholders by ensuring companies are not engaging in “accounting fraud” or “providing false or misleading information” (Securities, 2014). A third safeguard is the Whistleblower Protection Act. The Whistleblower Protection Act provides protection to individuals who find evidence of potential

Going public can have its’ advantages and disadvantages. Some advantages of going public are that it raises capital quickly, makes acquisitions easier, and can increase the prestige of the company. There are also disadvantages. These include owners losing decision making authority, adding pressure on short term growth, and increasing restrictions on trading and management. The largest two stock markets in the U.S. are the New York Stock Exchange (NYSE) and the National Association for Stock Dealers Automated Quotations (NASDAQ). One major difference in these two markets is that the NYSE has a physical location and trading takes place on the floor, where the NASDAQ is internet based and all trading takes place electronically. The NYSE also has restrictions on what companies can list, including a minimum of 2200 shareholders, trade 100,000 shares monthly, have annual revenue of $75 million, and have a market capitalization of $100 million dollars. Companies who do not meet these requirements trade on the NASDAQ. Also, firms that are traded on the NYSE are usually well established. Companies on the NASDAQ are usually technology based, with volatile, growth stocks. As a firm, the NASDAQ has fewer restrictions, and would provide a good opportunity to list on for an IPO. The NASDAQ is also the larger of the two exchanges. Because the stocks are more volatile and geared toward growth, a firm should be able to gain the necessary capital