Donald Trump campaigned vocally for the need to reduce the depth of regulations on the banking and finance industry. Republicans in Congress have already set in motion the sequence of events that will lead to the repealing of the Dodd-Frank Act.

The Dodd-Frank Act was enacted in the wake of the 2008 global financial crisis as a proactive measure to ensure that banks have more than enough cash buffers to prevent a future crash in the economy. The Dodd-Frank Act waters down the idea that some banks are "too big to fail" and it ensures that leading U.S. banks can survive any shocks that ripple through the global economy.

Bank investors are already looking forward to the axing of the Dodd-Frank Act because it could potentially provide them with a $100B windfall that they could return to investors. Interestingly, the Dodd-Frank Act is not yet in the coffin but corporations already have their sights on the next regulation they would want to be repealed or reformed. This piece looks into calls for the Trump administration to reform the Sarbanes-Oxley Act.

Meet the Sarbanes-Oxley Act

Congress passed the Sarbanes-Oxley Act (SOX) in 2002 in order to protect investors from potentially fraudulent accounting practices by corporations.  The Sarbanes-Oxley Act essentially adds another layer to the degree of regulation of financial practice and corporate governance by insisting on increased financial disclosures from firms to protect investors against accounting fraud. The SOX is good for investors but firms think that the government could reduce its 'stifling' effect on public companies.

The supporters of the Sarbanes-Oxley Act believe that the rule is of the reasons companies provide accurate numbers to investors, Josh Williams an analyst at Saxon Trade submits that "the rule creates an increased sense of accountability on business executives and it is doubtful that investors can afford to lose that sense of accountability on their investments."

Here's the case for the Sarbanes-Oxley Act

Supporters of SOX submit that mandating firms to have auditors review their internal control measures goes a long way in reducing the restatement of their financial statements. Companies can restate their financial statements if they find errors – in fact, a restatement is a laudable move that attests to the degree of accountability among U.S. businesses.

However, investors might have made investment decisions based on the erroneous financial statements and the restatement of accounts won't necessarily undo investment decisions made prior to the restatement. Hence, business executives can still perpetrate accounting fraud to further some ends and quickly do an about-face to restate the accounts before the error 'qualifies' as a fraud. Surprisingly, a survey conducted by the Government Accountability Office in 2013 that restatements had declined since SOX mandated firms to have auditors have an oversight on the review of internal controls.

Here's the case against the Sarbanes-Oxley Act

U.S. firms are especially interested in seeing a reform to part of the Sarbanes-Oxley Act that mandates them to allow auditors have a say on "Internal controls" that are designed to stop their executives from perpetrating accounting fraud.

Businesses are chief critics of the Sarbanes-Oxley Act and they believe that the act in its entirety places a cumbersome and stifling burden on businesses. For instance, Adam Ingles, head of regulatory risk solutions at MBAF submits that “we feel that dialing back some of those provisions would help spur economic activity and create jobs.” Adam's statement stems from the prevailing opinion that many small firms can't afford the audit costs associated with the internal control rules.

The detractors of the Sarbanes-Oxley Act think that the government can reduce its stifling nature on business by exempting more firms from its compliance. The SOX exempts companies from the auditor review for five years if they have annual revenue of $50M. However, some of the proposed changes to SOX will require as much as 10-year exemptions for small firms in other for them to find their footing without much regulatory burden.