Sarbanes-Oxley Act overview and implications

¶ … accounting discipline has taken a public relations beating over the past few years as a result of scandals in corporate accounting; much of this abuse has been well-deserved. Regulations regarding conflicts of interest, independent monitoring, reporting, and full disclosure to stockholders were thin at best, and in many cases were not enforced even when they did exist. The corporate accounting scandal wave changed that; public outcry for accountability resulted in Congress passing the Sarbanes-Oxley Act of 2002. This act contains many new regulations that have a profound effects on publicly traded companies, and that will directly affect this team and your corporation.

First, a quick summary of the actors involved: the FASB, or Financial Accounting Standards Board, and the Securities Exchange Commission, or SEC, have a mutually reciprocal relationship. The FASB issues standards regarding accounting standards which the SEC enforces; although the FASB is not an official government body (it operates independently), its standards of Generally Accepted Accounting Principles govern the operations of accounting throughout the United States. The SEC, as the enforcement and investigative arm of the government in the financial arena, basically enforces the standards produced by the FASB. A third actor, the Public Company Accounting Oversight Board. This independent board was created as a result of the Sarbanes-Oxley Act, to independently monitor and regulate accounting practices in the public realm. The PCAOB is a non-profit, private corporation whose only purpose is to protect the public by ensuring full transparency and accurate reporting by publicly-held corporations.

With those three actors in mind, let us examine the Sarbanes-Oxley Act (SOX) itself. Obviously, the question on everyone's immediate mind is how much the independent audits and employee man hours will cost. Some figures note that the average audit last year was an average of $2.4 million higher (Economist). The high prices can partly be attributed to the shortage of experienced auditors, leaving a few to do the work of the many (and charging in kind!). The cost is far and away the most obvious drawback to the SOX's implementation.

The benefits to SOX, however, are just as obvious as the arguments against. The increased transparency isn't just for the benefit of shareholders; company executives and government groups will also benefit from the whole picture that SOX's provisions require. More transparency will encourage better management and cost control.

The Act was initially intended to rebuild investors' confidence; this impact will be easy to track based on investment numbers. The Act also, however, will impact the industry in a variety of ways, one of those being that some publicly-held companies will find it more in their interest to go private. Scholars who have examined the switch note that privately-held firms are increasing in numbers, likely making the switch from publicly-held (or the initial decision to incorporate privately) based on the costs associated with SOX compliance. Not because these corporations want to evade regulation and fudge returns, but because the monetary expenditure on independent auditors and information technology systems to monitor everything that SOX requires is financially unfeasible.