Impact of Sarbanes-Oxley Act on businesses in emerging markets: A case for adoption in Ghana and Nigeria

By Isaac OYEGBADE

The Sarbanes-Oxley Act (SOX), enacted in 2002 in response to high-profile corporate scandals like Enron and WorldCom, transformed corporate governance and financial reporting in the U.S.

It aimed to restore investor confidence by imposing stringent requirements for internal controls, financial reporting, and auditing (Coates, 2007; Coffee Jr., 2002). While SOX primarily targets U.S. public companies, its principles have influenced global markets, particularly in emerging economies where regulatory frameworks are often underdeveloped (Hail, 2010).

This article evaluates the impact of SOX on business and financial statement audits in emerging markets through comparative case studies, exploring how firms in emerging markets including Malaysia, India, South-Africa, and Mexico have adapted to SOX-inspired reforms and highlighting potential benefits to Ghana and Nigeria in aligning with its principles.

The corporate scandals that shaped Sarbanes-Oxley

Before the enactment of the Sarbanes-Oxley Act, several significant financial statement failures shook investor confidence and prompted calls for stricter regulation and oversight. Notable failures include:

• WorldCom: Estimated US$180 billion loss in total market value for WorldCom’s stock from its peak to its bankruptcy, attributed to fraudulent financial reporting (Sweeney, 2003).
• Enron Corporation: Approximately US$74 billion loss to investor stock value and employee retirement savings attributed to fraudulent financial reporting (McLean & Elkind, 2003).
• HealthSouth Corporation: Estimated US$2.5 billion loss to shareholder value due to fraudulent financial reporting practices (The New York Times).

The collective loss of several hundreds of billions in investor capital emphasized the inadequacies of the existing regulatory framework and led to the introduction of the Sarbanes-Oxley Act.

Key regulatory improvements of the Sarbanes-Oxley Act

• Enhanced Financial Disclosures: SOX mandates corporate officers to certify the accuracy of financial statements, significantly increasing accountability at the management level (Hammersley, 2006).
• Auditor Independence: SOX enforces auditor independence by prohibiting accounting firms from providing non-audit services to audit clients, thereby mitigating conflicts of interest (Baker, 2005).
• Whistle-blower Protections: SOX protects whistle-blowers from retaliation, encouraging a culture of transparency and accountability within organizations (Dworkin & Baucus, 2005).
• Increased Criminal Penalties: SOX raises penalties for financial reporting violations, acting as a deterrent against corporate fraud (Katz, 2003).

The case for adopting Sarbanes-Oxley principles in Ghana and Nigeria

As African countries, particularly Ghana and Nigeria, navigate the complexities of global financial markets, the adoption of principles akin to those in the Sarbanes-Oxley Act could significantly enhance their corporate governance frameworks and financial reporting practices. Implementing SOX-like reforms would not only improve transparency and accountability but also attract foreign investment, foster investor confidence, and promote economic growth.

• Enhancing Investor Confidence: The adoption of SOX-like regulations in India following the Satyam scandal exemplifies a successful response to corporate governance failures. The implementation of the Companies Act of 2013 introduced stringent audit and compliance requirements, significantly improving transparency, and restoring investor trust (Sahoo & Singh, 2018). Similarly, Ghana and Nigeria could benefit from adopting rigorous internal control mechanisms and enhanced disclosure requirements that reassure investors of the integrity of financial statements.
• Improving Corporate Accountability: The emphasis on corporate accountability in SOX provides a framework for holding top management responsible for financial reporting. In South Africa, the King Report on Corporate Governance (King IV) promotes ethical leadership and accountability, encouraging firms to align with global best practices. The implementation of these principles has positively influenced corporate behaviour, leading to improved governance outcomes (Institute of Directors in Southern Africa, 2016). By adopting similar principles, Ghana and Nigeria can cultivate a culture of accountability, ensuring that corporate executives are held responsible for the accuracy and reliability of financial statements.
• Promoting Whistle-blower Protections: The protection of whistle-blowers is an essential aspect of fostering an ethical corporate culture. In emerging markets like Mexico, the implementation of whistle-blower protection laws has encouraged individuals to report fraudulent activities without fear of retaliation. These measures have proven effective in uncovering corruption and promoting accountability (González, 2019). Ghana and Nigeria can enhance their governance frameworks by adopting robust whistle-blower protections, encouraging employees to speak out against unethical practices and ensuring that corporations uphold their ethical responsibilities.
• Deterring Corporate Fraud: Implementing increased criminal penalties for corporate fraud, as established by SOX, serves as a powerful deterrent against fraudulent activities. In countries such as Malaysia, the introduction of stricter penalties for corporate misbehaviour has been linked to a decline in corporate fraud cases (Khan & Saad, 2016). By adopting similar legal frameworks, Ghana and Nigeria can create an environment where corporate fraud is less likely to occur, thereby protecting investors and the integrity of their financial markets.

Conclusion

The adoption of Sarbanes-Oxley principles in Ghana and Nigeria could significantly enhance the regulatory landscape, promoting transparency, accountability, and investor confidence in African businesses. By learning from the experiences of other emerging markets that have successfully implemented similar reforms, both countries can establish robust corporate governance frameworks that not only align with global best practices but also cater to their unique economic contexts. As they strive for sustainable growth and integration into the global economy, the adoption of these principles could prove instrumental in building resilient financial markets that foster long-term economic development.

>>>the author is an experienced business founder and seasoned professional in External Audit, Financial Advisory, and Business Consulting, with nearly a decade of expertise. He has led financial statement audits for some of the largest public companies in Africa and the United Kingdom, spanning Financial Services, Consumer Goods, and Healthcare sectors, while assisting their U.S. subsidiaries in complying with SOX Act regulations.

As a trusted financial advisor, he supports company leaders in navigating complex capital-raising efforts across both public and private markets. He is also a published author on critical topics for African businesses, with works covering Initial Public Offerings (IPOs), debt and equity issuances, and financial regulations.

He holds a bachelor’s degree from Ekiti State University, Nigeria, and is currently an MBA candidate with a concentration in Strategy and Finance at Duke University in the United States. He is an Associate of the Institute of Chartered Accountants of Nigeria and a Fellow of the Institute of Management Consultants, Nigeria. He can be reached via email at: [email protected].

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