Twelve years ago, in 2001, or to be exact on December 2nd 2001, when people in Malaysia and all over the country were going through their normal life, people in The United States weren't. The nation was shaken by the collapse of Enron, a multibillion dollar corporation that employed thousands of employees and also a corporation that reached dramatic heights, only to face a dizzying downfall. Amidst the financial turmoil and shattered lives as well as reputations that the collapse left in its wake, questions rose regarding exactly how the catastrophe happened, why it happened, and who was involved. As mentioned early, the Enron's collapse affected many pension moneys, the lives of thousands of its workforces, many pension and also did trembled Wall Street to its very core. Even shareholders lost billions of dollars and there were no legal act to protect their investments in any manner. These humiliations didn't just caused massive money loss, but also brutally reduced public self-assurance in the securities market of the USA. Towards this period, many wonder how a corporation so gigantic and so influential vanished almost instantly. That is when The Sarbanes-Oxley Act of 2002 or SOX, as it is often called, came into the picture when the US Senate and House of Representatives passed it in order to reestablish public confidence in the trustworthiness of financial reporting. To be more specific, this act is known as legislation which ratified in response to the high-profile Enron financial scandals to safeguard the stockholders and the general public from accounting faults and falsified practices in the company. Furthermore, this Sarbanes-Oxley Act is not a set of business practices and does not require how a business or corporations should store the particular business records, but rather, it explains which records are to be stored and how long the duration should be. In addition to that, this act is controlled by the Securities and Exchange Commission or better known as SEC, which was formed by Congress to standardize the securities markets and protect investors. In addition to standardization and protection, SEC also monitors the business takeovers in the U.S. Besides that, SOX also increased the accountability of auditing firms to remain unbiased and independent of their clients. In addition to it, the Sarbanes-Oxley Act was also formed so that organizations were held responsible for all aspects of their tasks. So in a way it explained that any particular organization has no reason of mis-management and errors. These will automatically eliminate deniability on the part of an organization, which means the excuses of "we were not conscious" or "this was never brought to our consideration" are no longer valid. Lastly, it's worth mentioning that this Sarbanes-Oxley Act has been introduced by the two great men, Paul Sarbanes, a Democratic Senator from Maryland, and Michael Garver Oxley, a Republican Congressman from Ohio serving in the House of Representatives. They are responsible for the reason this act has been implemented.
How SOX affected Malaysian companies listed on Bursa Malaysia?
Malaysia Internal Control Disclosure Requirements
The implementation of Sarbanes Oxley Act has a wide and deep affects on Malaysian companies which listed on Bursa Malaysia. One of the main reasons how it affects is because of the internal control disclosure requirements and the creation of the Section 404. To be specific, the modifications resulted in the formation of the Public Company Accounting Oversight Board, the valuation of personal liability to auditors, board members, and executives. As it known, internal control is the procedure intended to make sure trustworthy financial reporting, agreement with applicable rules and regulations as well as efficient and effective processes. Besides that, safeguarding assets against theft and illegal use is also part of internal control. This means the section 404 requires internal control procedures, which did not exist before SOX act. So, when the SOX act is implemented, it affects Malaysian companies because now it requires including an internal control report with their annual audit. So, in order to protect their interests in the company the shareholders use internal control as a tool and one of the important difference between the Malaysian and U.S. internal control disclosure requirement can be seen when the internal control report in Malaysia is a written statement by the board of directors, while for U.S. the control report is a written statement by management. This shows that U.S. management instead of board of directors delivers the statements on internal control to shareholders where else in Malaysia, the board of directors is the one responsible to provide the statements on internal control to shareholders. In addition, there are three other major differences between the Malaysian and U.S. internal control requirements. The major point is that, Malaysian boards do not have to discourse on whether the internal control is operative unlike in the U.S. where the management has to discourse on the efficiency of the internal control nonetheless only as it relates to financial reporting. Next is the reporting period of the internal control report where in the U.S. is at a point in time while, in Malaysia the report covers the whole reporting period from the beginning date to the agreement date of the company's financial statements. Last of all, external auditors in the U.S. are compulsory to express two ideas on the company's internal controls to shareholders which include the view on management's assessment of the effectiveness of internal controls over financial reporting as well as a view on the effectiveness of internal controls over financial reporting. Where else in Malaysia, external auditors do not have to speak out on the efficiency of internal control to shareholders and management do not have to emphasize on the efficiency of internal control.
Company costs
Apart from the internal control disclosure requirements, Sarbanes-Oxley Act does affect the Malaysian companies which listed on Bursa Malaysia through company cost. To be exact, it gains additional costs directly accredited to the legislation because Malaysian companies endorsed the SOX act. To explain in detail about this, it can be said that initial costs associated to the act include an increased expenditure for annual audits, which the clients receive from the public accounting companies. Besides that, as mention early about the Section 404, the scope of audits broadened with the addition of this particular Section where it can be seen that not only do public companies pay a great amount of charges for audits, however they also need to purchase otherwise create internal control software, review their internal performance as well as create an internal control plan and also track. Furthermore, compare to U.S. companies, Malaysian companies are known as a small businesses. So these extra costs of obeying with Sarbanes-Oxley will affect them and in a way will likely wipe away their companies which are operating solely on profit. In a way, this situation is the main reason that forces the small companies to go private and avoid the extra amount of expenses. In addition, this extra expenses or also known as company cost contribute towards retrenchment which means more workers being lay off in order to cover the extra expenses due to the additional cost of SOX act. Moreover, through retrenchment also, workers as in this case particularly in Malaysia company will have a stressful, emotional as well as traumatic effect on workers who are still-employed along with those who have been laid off. Even the remaining workers may possibly feel discouraged to continue working and also will have uncertain feeling which eventually results in minor productivity within the business. Particularly, if the retrenchment method hasn't been handled appropriately. So this means knowing or without knowing, Malaysian companies listed on Bursa Malaysia will eventually have problems in their company output since the productivity will become low from the result of less efficiency workers in the companies.
Criminal penalties
Malaysia companies listed in Bursa Malaysia have been affected by the Sarbanes-Oxley act through the criminal penalties. In theory, the criminal or punishment penalties appear to be one of the laws where a person is proved guilty of a dishonest securities transaction which results on violation. Basically this act says that the Chief Financial Officer or also known as CFOs and Chief Executive Officer or also known as CEOs can be sent to prison for misleadingly verifying reports on internal controls and also corporate financial reports. In a way this act says that the unlawful activity is known as illegitimate fault. Besides that, the criminal penalties in Sarbanes-Oxley Act impose heavy fines which can eventually lead up to 20 years imprisonment for securities violations. This can be explained in an example when a corporation's financial report has been changed and the person in charge of it will be imposed with the heavy penalties and this type of unlawful act can be easily spotted and the main person that will highly get affected from this wrong doings is none other than the CFO and CEO because when comes to company financial report, they are the main person in charge of handling it. Furthermore, as I mentioned earlier this criminal penalties has it bad effects but having said that, there are good or also known as positive effects too which can be seen when this penalties assist the particular company to be conscious of their blunders as well as increase the trust and believe of an investors. This is because the penalties that have been opposed will eventually decrease the sum of mischief that will arise in a company. Likewise, the bad effect of this criminal penalty is that, if there is any type of wrong doings regardless of who did it, only the CFO and CEO will be punished for it or to be specific, they will take the blame since they are the one in charge of the financial report of a company. So in a way this will eventually make the investors to lose hope and trust in the company and ultimately will contribute a bad image to the company.
Conclusion
In conclusion, I will like to mention few observations from this particular Sarbanes-Oxley act. We have to know that the significance of collaboration and discussion in bridging differences are unquestionable. In this case, the Sarbanes-Oxley act which was passed at a time when the Senate and United States House both felt there was a necessity for more severe financial laws to be created at that moment and we believe that we have faith in that contribution from the foreign communal which has assisted us to expertise the rules that are well-structured and unbiased to all market contributors as well as, utmost vitally, to investors. Moreover, I think this is specifically what the SEC has done in implementing the Sarbanes-Oxley Act. Even though it has its bad affect on our soil, still there are also good affects towards our country. The effect, I believe, is significant to avoid pointless burdens and conflicts of law as well as it is essential to help bring back investor assurance in companies and businesses which in away it will increase the productivity of the company if the investors are willing to invest their money in the particular company. Furthermore, it can also help a particular company to stay in the market without any bad image from the wrongdoings or mis-leading activity. Besides that, the fact that the Sarbanes-Oxley Act could not avoid humiliations, similar to Lehman Brothers, where the company used a form of short-term borrowing for sellers in government securities which also known as repo where the seller sells the government securities to investors, generally on an prompt basis, to produce fake profits on security sales which has affected many people to eventually believe that the act was in reality a failure where they buy them back the following day, what can be concluded is that, Sarbanes-Oxley act has given equal amount of positive and negative impact towards any company especially in this case which is Malaysian companies listed in Bursa Malaysia. So it depend on the particular company whether they are capable of dealing with the impact that the Sarbanes-Oxley act has given them.
