Swot – Pepsi and Coca Cola Essay Example

stored and their duration but does not govern business practices or record storage methods. This legislation affects both a company's financial aspects and its IT departments responsible for electronic record keeping. Within Sarbanes-Oxley are three rules for managing electronic records: the first rule addresses record destruction, alteration, or falsification; while the second rule determines the required duration for storing records.

The third rule pertains to the storage of various types of business records, including electronic communications. A significant amount of literature has been published on the costs and benefits of the SOX Act for companies. This section will examine the implementation costs of the SOX Act, particularly Section 404, for large, mid-sized, and small public companies. Factors that impact all firms include the requirement of creating an internal control structure and assessing its effectiveness. This control structure encompasses controls on internal financial reporting and auditing. Surveys conducted by Financial Executives International on 224 public companies indicate that implementing this control structure has been more expensive than anticipated. In July, the estimated costs of complying with the SOX Act in 2004 had risen by 62% compared to expectations in January.

In March 2005, a survey discovered that 217 companies reported a 39% increase in costs. The rise in expenses primarily stemmed from higher consulting and software costs, as well as increased fees from external auditors. Compliance with the Sarbanes-Oxley Act (SOX) diverted funds from potentially profitable endeavors and could result in improper investments or risk mitigation, leading to a loss of value and productivity. It also necessitated the allocation of manpower for profitable activities within a firm. Small and mid-sized public companies incurred relatively larger costs in implementing

SOX. Despite the professional costs and managerial time being relatively constant regardless of company size, small and mid-sized companies had to allocate a higher percentage of their revenue to SOX compliance. Some of these companies considered measures like reverse stock splits to decrease their size below the threshold required to meet SOX's strictest regulations or contemplated delisting from the stock exchange. A study by Wharton School revealed that many companies chose to delist their shares as a strategy to avoid the high costs associated with complying with the SOX Act. Some smaller companies even reported compliance costs as high as $500,000. However, the study's authors suspected that companies delisted not only to avoid expenses but also to evade external monitoring and scrutiny, suggesting inefficient management or excessive compensation practices.According to a study conducted in 2004 (AP), firms that exhibited both higher free cash flow and lower-quality accounting were inclined to undergo the process of going dark. This process involved deregistering from the SEC and transitioning into being private entities.

Smaller companies, especially those that are publicly traded, may face difficulties in appointing independent board members. These companies often have a few board members, and the chief financial officer might also hold other positions. Limited resources make it difficult for smaller firms to find qualified individuals who meet the criteria for independence. To assist small and mid-sized firms, the SEC has taken measures to address these challenges. However, most discussions on this matter primarily focus on the costs of implementing Section 404's internal control structure rather than considering potential benefits for investors. One possible explanation is that the benefits investors receive are intangible, and behavioral finance analysis

does not provide conclusive evidence.

The implementation of the legislation is still in its early stages, and it will likely take some time to establish a functional and efficient control structure. An effective controls system can simplify accounting decisions by providing accurate and comprehensive profit and cost statements, which may have otherwise been more discretionary and based on broader, less informed accounting assessments. The establishment and adherence to a code of ethics can enhance the efficiency of financial data collection, leading to lower costs for financial restatements and auditing research. However, these costs may be prohibitive for firms, and the SEC's investigations into the impact of securities laws and SOX on small public companies will be interesting in this regard. The SOX Act has both positive and negative effects, particularly in terms of costs and benefits. Supporters of SOX argue that it was necessary legislation, especially after the collapse of companies like Enron since it has played a crucial role in restoring trust in capital markets and reinforcing corporate accounting controls.

Opponents of the legislation argue that it has reduced America's global competition with Foreign Service providers. They claim that the implementation of SOX has created a complicated and restricted environment in the US financial markets.