SOX Effect on CEOs and CFOs
In response to the market crash of 1929 and the subsequent Great Depression, the Securities Act of 1933 was enacted with the purpose regulating the offer and sale of securities (SEC, n.d.). The Securities and Exchange Commission (known hereafter as the SEC) was then created from The Securities Exchange Act of 1934 and given the responsibility of overseeing the securities industry and regulating conduct in various exchanges (SEC, n.d.). Under these Acts, firms were held accountable for informing investors of information necessary for the purchase of securities. These acts did have repercussions for firms that did not adhere to the regulations outlined by the SEC, but these held maximum penalties of $1 million in fines and up to 10 years in prison (Chang, Choy, & Wan, 2002, p. 180). The Sarbanes-Oxley Act (SOX) was enacted in 2002 after a slue of financial fraud cases, such as Enron and WorldCom, emerged. Under SOX, penalties for misstatement of information is serious than prior acts with maximum fines of $5 million and 20 years imprisonment for those employees who are charged with misleading or hiding evidence (Gleason, Madura, & Rosenthal, 2011, p. 25)
In addition to fines and imprisonment, Section 304 of SOX mandates that CEOs and …show more content…
(2002) notes that executive pay is smaller following the enactment of SOX (p. 182). This is due to the fact that SOX regulations restrict managers’ investment direction and therefore there is less of an association between managerial effort and firm performance (Chang et al., 2002, p. 182). This leads to a smaller total pay and incentive pay. Because Section 304 of SOX requires the forfeiture of incentive pay if financial reports must be restated, CEOs “demand less in incentive pay but more in fixed pay, resulting in a smaller sensitivity of a CEOs incentive pay to change in shareholder wealth in the post-SOX period” (Chang et al., 2002, p.
In response to the market crash of 1929 and the subsequent Great Depression, the Securities Act of 1933 was enacted with the purpose regulating the offer and sale of securities (SEC, n.d.). The Securities and Exchange Commission (known hereafter as the SEC) was then created from The Securities Exchange Act of 1934 and given the responsibility of overseeing the securities industry and regulating conduct in various exchanges (SEC, n.d.). Under these Acts, firms were held accountable for informing investors of information necessary for the purchase of securities. These acts did have repercussions for firms that did not adhere to the regulations outlined by the SEC, but these held maximum penalties of $1 million in fines and up to 10 years in prison (Chang, Choy, & Wan, 2002, p. 180). The Sarbanes-Oxley Act (SOX) was enacted in 2002 after a slue of financial fraud cases, such as Enron and WorldCom, emerged. Under SOX, penalties for misstatement of information is serious than prior acts with maximum fines of $5 million and 20 years imprisonment for those employees who are charged with misleading or hiding evidence (Gleason, Madura, & Rosenthal, 2011, p. 25)
In addition to fines and imprisonment, Section 304 of SOX mandates that CEOs and …show more content…
(2002) notes that executive pay is smaller following the enactment of SOX (p. 182). This is due to the fact that SOX regulations restrict managers’ investment direction and therefore there is less of an association between managerial effort and firm performance (Chang et al., 2002, p. 182). This leads to a smaller total pay and incentive pay. Because Section 304 of SOX requires the forfeiture of incentive pay if financial reports must be restated, CEOs “demand less in incentive pay but more in fixed pay, resulting in a smaller sensitivity of a CEOs incentive pay to change in shareholder wealth in the post-SOX period” (Chang et al., 2002, p.