Sarbanes-Oxley: Long Overdue or Not Worth the Trouble?

Years after its passage, the 2002 Sarbanes-Oxley Act, called SOX for short, still sparks intense debate. Does this federal law succeed in protecting investors from false and misleading financial statements? Or is SOX the disaster its most vehement detractors claim it is, hobbling business with spiraling costs, plus lots and lots of paperwork?

Everyone agrees that SOX costs business far more than was projected at the time that the bipartisan bill sailed through Congress virtually unopposed. After SOX, audit fees paid out by public companies soared by an estimated 80 percent, a hike thats especially difficult for smaller companies to absorb. Complying with one part of the law, namely Section 404, has proven to be an especially expensive proposition, costing U.S. business approximately $6 billion a year. Section 404 requires that both a public companys managers and an outside accounting firm examine each and every year, and in considerable detail, a companys internal financial reporting processes.

So are the benefits of these more stringent reporting requirements worth the cost and aggravation?

No, say SOXs opponents.

• SOX is a hastily written, poorly thought-out overreaction to the accounting scandals uncovered at Enron Corp., WorldCom and other companies. The only thing its accomplished is to add costs and create major bureaucratic headaches. And how necessary can SOX be? After all, the government successfully prosecuted Enrons Kenneth Lay and Jeffrey Skilling under pre-SOX law.

• SOX doesnt stop fraud. What Section 404 really does is focus in a very narrow way on making sure that each accounting entry has been properly recorded and documented. But the real problem isnt flawed bean counting. Its the lack of integrity displayed by some executives.

• SOX has succeeded in blunting the competitive edge of U.S. capital markets, such as the New York Stock Exchange. In the period immediately following the bills passage, there was a significant drop in the number of companies who chose to go public by offering shares to the general public for the first time. Companies, especially smaller ones, decided theyd rather stay private than have to cope with SOXs heavy burdens.

Yes, says SOXs supporters.

• To be sure, SOX increased costs. But you need to place the hike in auditing fees in perspective. During the 1990s, competitive pressures caused accounting firms to reduce their auditing charges substantially; these artificially low fees make the current increase seem larger than it actually is. And some companies, at least, admit theyve benefited from the SOX process. The time and money theyve spent has resulted in better, more efficient financial reporting systems.

• SOX results in more accurate financial statements. Over 20 percent of U.S. public companies issued restatements of earnings after Section 404-mandated testing uncovered errors. And because upper-level executives must now assume personal responsibility for the accuracy of their companys financial statements, theyre taking their jobs far more seriously.

• The causes of the drop in the number of companies going public are more numerous and complex than the introduction of more strict reporting requirements. Besides, over the long run, SOXs tougher standards will benefit U.S. capital markets. Such markets are based on trust, and SOX boosts investor confidence in the trustworthiness of corporate reports. Our sterling reputation is our competitive edge, insists Securities and Exchange Commission Christopher Cox.

You decide

1. So it has been over 10 years and a several political changes...Do you think Sarbanes-Oxley is likely to be effective in preventing corporate fraud? Why or why not (evidence)?
2. If you were an executive at a large corporation, do you think youd conclude that the benefits of complying with Sarbanes-Oxley are worth the cost? What if you were a small business owner? A stockholder?
3. The original Sarbanes-Oxley legislation takes a one-size-fits-all approach to imposing its mandates on public companies. Suggest ways that the regulatory burden could be lessened on smaller companies. Which approach, if any, would you recommend and why (support your position)?

Post your answers to one of the two options above and consider replying to a student who chose the other option.