Sarbanes-Oxley Legislation: Pros and Cons Positive Effects

Sarbanes-Oxley Legislation: Pros and Cons

Positive effects

According to some analysts, despite its costs, Sarbanes-Oxley legislation had some potential benefits for organizations: the additional documentation has amounted to a kind of enforced 'best practices' analysis. It "allows for complete documentation of processes identifying any gaps in a desired 'Best Practices' state" and offers an "opportunity to rethink old processes -- you may be using 10-year-old processes that don't offer your department maximum effectiveness in today's tax environment. Consider what can be done a better way? What have you been hoping to change, but haven't yet found the opportunity or reason to act?" (Guelker 2004). The 21st century frenzy of mergers and acquisitions which can make such best practices opaque to management in a highly bureaucratic organization make this even more pertinent -- leaders must have a clear idea of how organizations are managed to both prevent fraud allegations under SOX but also to improve efficiency (Wagner & Dittmar 2005).

Negative effects

However, others say that the additional expenses and red tape incurred by the legislation have been unnecessarily punitive on blameless organizations. It subjects all corporations to the same types of controls needed to reign in the worse abusers. One of the primary reasons the landmark Sarbanes-Oxley legislation was passed was the concern that there was too 'cozy' a relationship between auditors and the corporations they were assessing. "Sarbanes-Oxley highlights the potential dangers of the same firm undertaking both auditing and tax services for a company by altering the relationship between external auditors and a company's Audit Committee. Whilst not prohibiting auditors from undertaking tax services, Sarbanes-Oxley introduces a new requirement for such services to be approved or 'pre-approved' by a company's audit committee, imposing new responsibilities on both the corporate tax department and the audit committee" (Kushwaha 2004). SOX set a clear demarcation between the interests of the company and the interests of auditors: "services auditors cannot perform at the same time as the audit under any circumstances. These include bookkeeping, internal audit outsourcing, temporary or permanent work as an employee, officer or director, legal services and others. There are some circumstances where certain tax work is a prohibited nonaudit service but it isn't clear when other tax services are prohibited" (How to cope in an uncertain present, 2003, Journal of Accountancy). But detractors say that merely because the documents produced by an auditor have a clearer veneer of 'objectivity' in terms of their source and origin does not necessarily root out tax fraud.

Conclusion: Opinion

Overall, even for businesses that were initially resistant, there is widespread acknowledgement that the legislation has had some beneficial effects. "Despite the grumbling, there's increasing evidence that reform has been well worth the trouble. Already, intense scrutiny of accounting methods and internal controls has unearthed lingering problems in the way companies operate. And fixing weak financial controls has nipped a lot of accounting problems in the bud." (Death, taxes, and Sarbanes-Oxley, 2005, Businessweek). However, given the regulatory expense for taxpayers as well as for companies, the measurable dividends of the legislation remain mixed. "People would like to think that the legislation has forced companies to have better internal controls, and therefore fraud risks are reduced. Yet there is no real evidence that fraud risk or actual fraud has been reduced because of Sarbanes-Oxley" (Coenen 2010). Additionally, small businesses are exempt from many of the stipulations of the law, meaning that they enjoy none of the additional benefits of due diligence and do not have the regulatory scrutiny of their internal controls even though fraud can be committed by any organization of any size.