The Real Cost of Sarbanes-Oxley Compliance: Worth It?

Introduction: SOX and the Question of Cost

Though the Sarbanes-Oxley Act is not the only piece of regulatory legislation in effect for publicly traded corporations today, it is without question the most costly. Enacted in 2003 after a spate of "creative accounting" scandals and company failures cost investors billions of dollars, the Sarbanes-Oxley Act has been singled out by some as a major cause of rising corporate costs in the past decade (Engle, 2009; Chang et al., 2009). Furthermore, the recent financial meltdown is proof positive that these regulations are not enough to guarantee even a modicum of shareholder safety; should the market choose to go down, then down it shall go, accounting irregularities or no. Many have wondered whether the regulations imposed by the Sarbanes-Oxley Act are actually worthwhile to corporations and investors alike. The costs of compliance are considerable, and the added assurance that these regulations provide to investors seems negligible at best.

Political Origins and Economic Rationale

It has been suggested that the Sarbanes-Oxley Act was motivated more by political than economic expediency, coming quickly on the heels of scandals and collapse at Enron, WorldCom, and other companies, and that the actual immediate and long-term effects of the various provisions of the Act were not investigated — let alone understood — before it was passed into law (Chang et al., 2009). On the other hand, investor confidence was measurably restored following the passage of the Act and the resultant change in regulations, achieving both a pragmatic and an intangible benefit for the costs of compliance (Engle, 2009; Chang et al., 2009). Other direct extrinsic benefits to corporations from compliance with the Sarbanes-Oxley Act are minimal at best, and according to some critics it would take a substantial and sustained increase in consumer confidence to pay back compliance costs.

The Declining Burden of Section 404 Compliance

This argument may not hold much water, however, as increasing evidence suggests that despite the initial costs of compliance, additional costs in subsequent years — once mandatory provisions had already been put in place — are minimal (FEI, 2008). Section 404 of the Sarbanes-Oxley Act has been the most costly section to comply with, and the most frequently criticized for that reason, but in 2007 the average cost of Section 404 compliance for companies whose average revenues were well into the billions was $1.3 million for companies with centralized operations and $1.9 million for those with decentralized operations (FEI, 2008). These costs are certainly worth noting, but when they represent significantly less than one-tenth of one percent of a company's revenues, it is difficult to characterize them as prohibitive. Costs were certainly higher in previous years, but their reduction suggests that the new regulations have become an accepted mode of doing business (Chang et al., 2009).

Conclusion: Is the Payoff Worth the Price?

This brings us back to the initial question: is the payoff for Sarbanes-Oxley compliance worth the cost? The only simple answer is that it is too early to tell definitively. Yet the most recent numbers strongly suggest that compliance is not the costly affair it was once thought to be, and confidence in the benefits of the new regulations has increased almost as quickly as the costs of keeping up with them have decreased. The recent financial upheaval has made all of this somewhat irrelevant in the immediate near term, but when the dust fully settles it is likely that these trends will continue. After all, greed and dishonesty were never really good for business.