Corporate Consensus is that Sarbanes-Oxley Stinks

The Sarbanes-Oxley Act was pushed into law in 2002 in response to a cluster of corporate failures caused by accounting fraud. Proponents of the legislation say that it helps protect shareholders and stakeholders in public companies by creating stricter accounting controls. Opponents of the Sarbanes-Oxley Act believe that the law creates disincentives to businesses, because they must comply with very strict regulations in order to start a new business or to simply continue to operate. The question that matters most is this: "Is it worth the cost?"

Because of the accounting scandals at Enron, WorldCom, and other large, public companies, Congress felt an overwhelming responsibility to protect America from other violations such as these. The shareholders of these companies lost all of their invested money when the companies went bankrupt. Congress believes that Sarbanes-Oxley can change that.

The problem wasn't just that the corporations went under; corporations do that every day. The problems were in the shady dealings by the business leaders. Although the companies had been steadily losing money for years, there were no indications on the financial statements. Through various methods of deception, the executives were able to hide the fact that they were going out of business. Many people had their retirement savings stashed exclusively in a company's stock, and those people lost every penny they had invested with the companies. At so many levels, the companies' deception caused major problems with their stakeholders. Enter the federal government. Congressmen Sarbanes and Oxley drafted a bill (the aforementioned Sarbanes-Oxley Act) that would correct the problems. This legislation was, "The most sweeping securities legislation since the 1930s, the [Sarbanes-Oxley] law aims to restore investor confidence by giving government more power... [It] has the power to sanction accounting firms--and prescribes tough penalties for wrongdoing... [Including] destroying, falsifying, or altering records" (Florian, 2003, ¶5). And so, in a matter of days, the SOX bill was passed that would change the face of American industry.

Although detractors may disagree, there are several points in Sarbanes-Oxley that are potentially beneficial. According to Dittmar and Wagner (2006), some of the benefits include more standardized IT processes, reduced organizational complexity, internal controls in partner corporations, and more effective use of controls. As a result of these benefits, shareholders get protection and enhanced shareholder value (¶3). This allows companies to have better control of their costs. They now have an abundance of information at their fingertips, and it would not be intelligent or economical to ignore the positives of such data. The Sarbanes-Oxley Act also gives the government more power to punish corporate criminals. This, in turn, gives investors more confidence in the company's ability to manage money properly. According to Business Wire (2004), thirty-seven percent of financial executives believe that "SOX increased shareholder value because investors know they operate as an ethical business" (¶5). Also, the Sarbanes-Oxley Act has helped to increase awareness of corporate matters worldwide. According to Christian (2005), although SOX may only cover U.S. companies, they have raised global compliance to a new level (¶5). Whatever opponents' opinions may be, these benefits are evident.

Even though the directive may have benefits to shareholders and stakeholders, there are also considerable costs to contemplate. One expert describes the Sarbanes-Oxley legislation with disdain, "The preposterousness of this legislation is demonstrated by the fact that no two accountants can agree on whether a company has actually complied with the act" (Forbes, 2005, ¶4). If a CEO gets accounting advice from one professional, and another professional gives him different advice, then there is no clear way to solve the dilemma. Another problem that businesses have is the inequity of Sarbanes-Oxley. The problem could flow in the other direction, though. Even after a company has complied fully with the applicable laws, they still may have to wait until "the external auditor comes along and retests everything that management has already looked at" (Solomon, 2005, ¶3).

Small businesses also have many problems with the legislation, because they don't have the financial resources to hire accountants or lawyers for assistance. A member of the SEC's smaller companies advisory group sums it up, "You're hitting everything with a sledgehammer rather than hitting the nails with a small hammer and the spikes with a sledgehammer" (Feldman, 2005, ¶4). According to Feldman (2005), Oxley himself has begun to second guess the legislation (¶12). It may be because of the misrepresentation of the compliance costs from the beginning. The costs were estimated, "Just $91,000, on average, for all companies, according to the SEC" (Feldman, 2005, ¶8). The understatement of the costs may not have been a problem if they had fallen within a reasonable range. However, this was clearly not the case. In 2005, "public companies were spending $4.4 million on average... More than double what they'd thought it would cost in January 2004" (Feldman, 2005, ¶15). Another study, according to Wegner (2005), found that firms paid an average of $1.4 billion more for SOX costs between 2003 and 2004 (¶8). It is obvious that many companies are having more than a little trouble complying with the price of Sarbanes-Oxley.

As with all things in life, the SOX legislation has costs and benefits. Some costs are associated with the implementation of new accounting and record-keeping software. Also, the companies will have increased business expenses related to information technology, accounting, and law services. The major benefit is increased peace of mind for stakeholders and shareholders; they will have less fear of corporate misdeeds, since there is a watchdog looking at the companies' actions. Even considering the positive points, I do not think that the Sarbanes-Oxley Act is worth the trouble it has caused. According to Business Wire (2006) a survey conducted on the CEOs of several large companies shows that about three-fourths of the respondents do not believe the benefits of Sarbanes-Oxley have been worth the costs (¶2). Companies could take the millions of dollars of compliance costs and send them out as dividends, charity donations, or reinvestments to further grow the business.

There is no reason to make thousands of companies comply with Sarbanes-Oxley, since it doesn't even concern most of them. There may even be a middle ground. Companies can voluntarily report, complying with SOX standards, and they can get a "gold star of approval" from the government. I found it very interesting to read Franklin Roosevelt's words: "The Federal Government cannot and should not take any action... Approving or guaranteeing that newly issued securities are sound, in the sense that their value will be maintained or that the properties which they represent will earn profit" (Chinnai, 2007, ¶4). If the government is going to regulate corporations even more heavily than it already has been, then there should be a benefit for the companies. Punishment avoidance should not be the only reason for companies to follow Sarbanes-Oxley regulations.

I believe that the requirements are a disincentive to potential businesses, or it could be an incentive for companies to become private instead of public. An expert on the topic had this to say, "In the first nine months of [2003] 60 public companies have retreated from the spotlight -- up from 49 in the same period in 2002 and 32 in 2001" (Shearer, 2003, ¶2). There are already regulations on financial statements, such as GAAP (generally accepted accounting principles). Why not enforce the rules we already have instead of creating more? Not to be cruel or heartless, but if the stockholders had diversified their investments, they would not have lost everything! There is an old saying that relates to "putting your eggs in one basket" that comes to mind. As previously stated, the costs clearly outweigh the benefits in this case.

In conclusion, the Sarbanes-Oxley Act of 2002 is a drain on Corporate America. Although people may want stricter controls on corporate finance, the controls should be voluntary. The costs associated with complying with SOX are much greater than the possible benefits of Sarbanes-Oxley. Corporate ethics has been pushed to the forefront by these recent scandals, and there is much room for discussion on various corporate ethics topics. If ethical standards had been enforced, then there should have never been a problem with illegal reporting on financial statements. Knowing what is right and doing what is right are two very different ideas.

References

(2004). Financial executives call Sarbanes-Oxley compliance a 'good investment,' but one with a 'high cost' according to a survey by Oversight Systems. Business Wire. 14 Dec 2004. Retrieved from the ProQuest database.

(2006). Real effects of SOX: Costs down but value questioned - CEOs become more risk-averse, according to research from RHR International. Business Wire. 10 May 2006. Retrieved from the ProQuest database.

Chennai. (2007). Keeping the market regulated and kicking. Businessline, p1. Retrieved from the ProQuest database.

Christian, A. (2005). Manual processes must be automated to cut cost of Sarbanes-Oxley audits, says Basda. Computer Weekly. 25 Oct 2005. Retrieved from the ProQuest database.

Dittmar, L. & Wagner, S. (2006). The unexpected benefits of Sarbanes-Oxley. Harvard Business Review.

Feldman, A. (2005). Surviving Sarbanes-Oxley. Inc., 27 (9). Retrieved from the Academic Search Premier database.

Florian, E. (2003). Can tech untangle Sarbanes-Oxley? Fortune, 148 (6). Retrieved from the Academic Search Premier database.

Forbes, S. (2005). Dump this destructive deadweight. Forbes, 176 (4). Retrieved from the Academic Search Premier database.

Shearer, B. (2003). Fleeing from public ownership. Mergers & Acquisitions: The Dealermaker's Journal, 38 (11). Retrieved from the ProQuest database.

Solomon, D. (2005). Corporate governance: at what price? Critics say the cost of complying with Sarbanes-Oxley is a lot higher than it should be. Wall Street Journal. 17 Oct 2005. P3. Retrieved from the ProQuest database.

Wegner, J. (2005). University report finds anti-fraud law costing firms plenty [Electronic version]. Knight Ridder Tribune Business News. 4 May 2005. P1. Retrieved from the ProQuest database.