SARBANES-OXLEY – CONTEXT & THEORY: MARKET FAILURE, INFORMATION ASYMMETRY & THE CASE FOR REGULATION

Sean D. Jasso, Ph.D. © Journal of Academy of Business and Economics, Volume 9 (3) 2009 ISSN: 1542-8710

ABSTRACT On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002. At the heart of the Act is the mandate for corporate reform from the massive financial and leadership fraud of the late 1990s and early 2000s. This paper is part of a series of essays that attempts to look deep into the soul of the Act not only evaluating the efficacy of the policy, but also to verify the heralding for a new dedication to the ethical and moral boardroom in the public corporation. The larger project consults legislative, legal, historical, and philosophical primary and secondary research to confirm the big question, ‘Does Good Behavior Pay Off?’ In this installment, I look to the Act itself recognizing that the literature on Sarbanes-Oxley (SOX) to date has lacked the theoretical framework necessary for fully understanding its public policy domain. The only consistent criticism on SOX from its inception has been from management, economic, and political scholarship predominantly targeting its financial impact upon the corporation through its rigid compliance mandates. The primary objective here is to understand Sarbanes-Oxley as public policy in response to market failure – that is, when the market stops providing efficient and ethical solutions to society. Key words: Sarbanes-Oxley; Market Failure; Information Asymmetry; Public Policy Analysis; Regulatory Environment; Benefits and Costs; Theory of Commerce; Ethics; Corporate Governance. 1. INTRODUCTION This paper addresses the questions how does the concept of market failure apply to ethical corporate governance? Are corporate ethics authentic in the modern corporation or just lip service? Will Sarbanes- Oxley achieve results? To attend to these questions the essay is organized in three sections. First, I address the historical and philosophical context of the firm as depicted both by Aristotle and Adam Smith, both leading thinkers on the concept of commerce and its impact on society. Second, I examine the issue of market failure and information asymmetry, the theories guiding the reactive regulatory measures of SOX attributed to corporate bad behavior. Third, I analyze the Sarbanes-Oxley Act from the perspective of the policy analyst following the politics that designed the bill to the implementation agencies that oversee its mandates. The ultimate objective is to provide a better understanding of the regulatory connection between government and the corporation. The guiding hypothesis is that Sarbanes-Oxley is effective legislation implemented at the right time to not only protect the investor from corporate fraud and to force executives to strengthen corporate ethical standards, but moreover, to solidify that the US market remains strong and that it is not only open for business, but it is a safe place to work and invest. I argue that SOX is the necessary policy tool to achieve these goals.Writing a 2 page single space article review.
Focus more on take away and idea, thoughts. Don’t spend too much space to summarize.