Sarbanes-Oxley in Retrospect: In the Beginning
We're coming up on the sixth anniversary of the passage of the Sarbanes-Oxley Act which still stirs strong emotions. Indeed, when President George W. Bush signed it into law on July 30, 2002, he called it "the most far-reaching" business regulation reform since the days of Franklin Delano Roosevelt.
Whenever I post a blog item, I almost always get a strong reaction if it involves Sarbanes-Oxley, or SOX. So, I thought I'd work up a three-part series of the law and its impact to stir discussion.
SOX was born of despair and reaction. Congress embraced SOX at time when the public and the business community were still reeling from a series of high-profile cases of corporate corruption, hubris and failure such as Enron, WorldCom and Global Crossing in the late 1990s.
Some, like Enron, involved scheming financial officers taking advantage of gullible investors with state and federal regulators, and accounting firms standing by and winking. Others were based in too much exuberance over technology such as fiber optics. Accounting firms started marketed themselves as consultants to their customer firms, creating a whole new area of conflict. Bankers loaned huge sums while ignoring risks. All the while, C-Suite executives managed to win exponentially larger and arguably undeserved compensation packages that often didn't make sense.
SOX set the whip to all 17,000 or so public firms large and small. It created a new auditing oversight body, the Public Company Accounting Oversight Board, and required disclosure of potential conflicts by officers, auditors and others. The most nettlesome part was Section 404 which required management to attest to internal and external auditing controls. Individuals found guilty of violating SOX can face 20 years in prison.
Naturally, there was plenty of whining that the majority were being made to pay for the sins of a few. Some estimates of SOX compliance went as high as $1.4 trillion and the law created a huge burst of work for accounting firms.
Complying was much easier for large firms or "accelerated" filers who could dump the cost somewhere, such as on their customers or their shareholders. Yet after going through the SOX compliance drill, shareholders and lenders found their lives were getting easier since they had more confidence in the financial information they were receiving.
Not so smaller firms. A Securities & Exchange Commission study found that it cost firms with less than $100 million in revenue about 2.55 percent of their revenues for SOX compliance compared with .06 percent for firms with more than $5 billion in revenues. In other words, it was 40 times more expensive for smaller firms to comply with SOX. Of all the criticisms of SOX, this one seemed to have the longest legs
Next: More SOX impacts are felt
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