Sarbanes-Oxley in Retrospect: SOX Comes of Age
In the first two installments of this three-part series, I talked about the birth of the Sarbanes-Oxley Act and about how it spread fear and loathing among business leaders in the U.S. Flash forward to today. Having taken effect nearly six years ago, SOX has settled in. Was it worth it? What's next?
For large public companies, the learning curve was over a while ago. Most consider SOX compliance part of everyday life since they've had to comply in 2004.
Not so for small companies, especially "non-accelerated filers" which are firms with less than $75 million in public equity. On June 20, the Securities & Exchange Commission gave them an extra year â€" to Dec. 15, 2009 â€" to start providing internal and external attestation reports with their 10-K annual reviews. When that deadline is reached, just about every element of SOX will be in place.
Has it been worth it? That's a very touchy question, but my vote is "yes." Here are some reasons why:
- Costs have been rationalized. While early costs were high, ranging from about $5 million for big companies to about $2 million for middle-sized ones, the overall costs have gone down from year to year as accounting departments and their outside auditors get used to the drill. Even though small companies have been whipsawed by changing deadlines, their costs are going down, too. Lord & Benoit, a Massachusetts consulting firm, reports that small firm compliance cost has dropped from about $500,000 to $250,000.
- SOX has made a difference in fewer shareholder lawsuits. As companies are forced to report their finances in a more disciplined way, shareholders have less to complain about. For instance, the Securities Class Action Clearinghouse of Stanford University Law School, reported that securities fraud litigation activity was about 14 percent less for the 1997-2006 period. SOX must be the answer. However, there was an up-tick in lawsuits in 2006-2007, but that probably has more to do with the stock option backdating and sub prime mortgage scandals.
- SOX compliance is making it easier for U.S. firms to attract funds and goodwill in overseas markets. SOX has been a brake for fraud and a yardstick for good balance statements. Other countries, such as Japan and Great Britain have similar laws.
For more on SOX and how to deal with it, see our crash course, "How to Survive (and Win) with Sarbanes-Oxley," and "Four Reasons to Love Sarbox."
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