The Sarbanes$-$Oxley legislation in the United States was introduced in $2002,$ partly in response to the earlier failure

of the American energy company, Enron. It was decided by United States legislators that compliance should be

enforceable under law rather than under listing rules. At the time it was being debated, some said that the legal

enforceability of Sarbanes$-$Oxley would be unfair to smaller companies without the infrastructure needed to generate

internal control data and to report on it$.$ One example of this was the debate over s$.404$ of Sarbanes$-$Oxley, which

mandated external reporting on the adequacy of internal controls. Before a size criterion was later introduced, this

applied equally to all companies but now smaller companies are partly exempted from this requirement.

In its advice on this requirement, the United States Securities and Exchange Commission $($SEC$)$ published the

following comments:

The rules we adopted in June $2003$ to implement s$.404$ of the Sarbanes$-$Oxley Act of $2002(\text{'}$Sarbanes$-$Oxley'$)$

require management to annually evaluate whether internal control over financial reporting $($ICFR$)$ is effective at

providing reasonable assurance and to disclose its assessment to investors. Management is responsible for

maintaining evidential matter, including documentation, to provide reasonable support for its assessment. This

evidence will also allow a third party, such as the company's external auditor, to consider the work performed by

management.

Required:

principles is under law

listing rules $-$ strict rule based

a$.$ Distinguish between rules and principles$-$based approaches to the regulation of corporate

governance and explain the disadvantages of a rules$-$based system such as Sarbanes$-$Oxley in

the United States. $2$ part in this question

$2$ to $3$ disadvantages

$(7$ marks$)$

b$.$ Construct the case to exempt smaller companies from the full reporting requirements of s$.404$

of the Sarbanes$-$Oxley Act $2002.$

$(8$ marks$)$