Sarbanes-Oxley Act: Cost Benefit Analysis

Cost/Benefit Analysis of the Sarbanes-Oxley Act
Dariya Gogueva
Kaplan University

Cost/Benefit Analysis of the Sarbanes-Oxley Act
US Congress passed the Sarbanes – Oxley Act (SOX) in 2002 in response to massive corporate and accounting scandals in companies such as Enron, WorldCom, and Tyco. The purpose of SOX was to improve the corporate behavior in the US, in order to prevent fraud and to gain investors’ trust and confidence in the market by implementing rules and restrictions. Since SOX Act has been effective there are a lot of different opinions and debates on its necessity and whether benefits outweigh the costs. In this paper, I am going to analyze the costs and benefits of Sarbanes-Oxley Act and figure out whether
benefits overweigh the costs.
Sarbanes – Oxley Act and Its Provisions
Due to corporate financial and accounting scandals in late 2001, Congress passed the Sarbanes –Oxley Act (SOX) that was signed into law by President Bush on July 30, 2002. Sec.gov (n.d.). SOX Act named after two main creators, Senator Paul Sarbanes and Representative Michael Oxley. The purpose of SOX was to improve the corporate behavior in the US, in order to prevent fraud and to gain investors’ trust and confidence in the market by implementing rules and restrictions. The SOX act is consists of eleven titles where each title contains specific requirements for financial reporting. Those titles are: Public Company Accounting Oversight Board (PCAOB), Auditor Independence, Corporate Responsibility, Enhanced Financial Disclosures, Analyst Conflict of Interest, Commission Recourses and Authority, Studies and Reports, Corporate and Criminal Fraud Accountability, White-Collar Crime Penalty Enhancements, Corporate Tax Returns and Corporate Fraud and Accountability. Provisions of SOX - Sarbanes-Oxley Act (SOX). (n.d.).
Sox act in section 302 requires managers to be responsible for financial reports that are laid out by corporation. The managers have to review the report and make sure there is no misleading information and then sign it. The section of SOX, which requires an internal control report, is the section 404. The internal report must be included in the annual report and should assess procedures for financial reporting and internal controls. Sarbanes-Oxley Act Section 404. (n.d.). Another important section of Sarbanes – Oxley Act is section 802 that puts on severe penalties for falsifying, altering, destroying and concealing documents with the intent to disturb or influence the legal investigation. (Sarbanes-Oxley Act Section 802. (n.d.). These penalties fines, fees, or/ and up to 20 years of imprisonment.
Benefits and Costs of Sarbanes - Oxley Act
The main advantage of Sarbanes – Oxley Act is the reason for the regulation. Before SOX Act, due to financial scandals many investors lost confidence and did not trust corporations with their money. SOX regulations and requirements retrieved investors’ confidence, so they now trust their money to companies they invest. Another benefit is the accounting and audit quality improvement. The Public Company Accounting Oversight Board (PCAOB) inspections under SOX improve quality of audit by driving low-quality auditors to exit the market. Coates & Srinivasan (2014). Therefore, only qualified auditors perform audit and fraud detection increased from 6 to 24 present in the post SOX period. Coates & Srinivasan (2014).
There are direct monetary costs and intangible indirect costs of the SOX.
The direct costs include expenses for internal control testing and reporting and audit fees to attest the audit effectiveness. These are most expensive cost of SOX, and they are in section 404. Securities Exchange Commission (SEC) has estimated the cost of the internal section 404 (a) for compliance and section 404 (b) cost of auditor attestation. The cost of compliance per filer is about $91,000. However, SEC did not do the estimation for the cost of audit certification. (Coates & Srinivasan, 2014). According to Coates & Srinivasan (2014, p16) direct cost has been falling for over the time from 15 present to 40 present, and it varies with a size of the company. The intangible indirect cost of SOX is going public. Since SOX Act became law, many businesses are going private because implementing SOX is costly for them. Also, the young growing companies in order grow and go public must seek extra sources of financing than their cost of capital will likely rise.
Conclusion
Even though the Sarbanes-Oxley Act is not perfect and has weak areas that need to improve, upon my research I found out that the benefits overweight the costs. Taking into consideration the benefits and costs I came to a conclusion that SOX Act is one of the most important Acts that made a positive change in business world by increasing accountability, reliability, transparency and by regaining stakeholder 's
confidence.

References
Coates, J. C., & Srinivasan, S. (2014). SOX after Ten Years: A Multidisciplinary Review. Accounting Horizons, 28(3), 627-671. doi:10.2308/acch-50759 Retrieved from http://eds.a.ebscohost.com.lib.kaplan.edu/eds/pdfviewer/pdfviewer?vid=1&sid=e146ee41-7958-4b6a-a485-d2801549c47d%40sessionmgr4001&hid=4102
PCAOB - Sarbanes Oxley Act of 2002. (2010). Sarbanes Oxley Act of 2002.pdf Retrieved from http://pcaobus.org/About/History/Documents/PDFs/Sarbanes_Oxley_Act_of_2002.pdf
Provisions of SOX - Sarbanes-Oxley Act (SOX). (n.d.). Retrieved from http://sox.info/provisions.htm
Sarbanes-Oxley Act Section 404. (n.d.). Sarbanes Oxley 404 Made Easier. Retrieved from http://www.soxlaw.com/s404.htm
SEC.gov. Federal Securities Laws - U.S. Securities and ... (n.d.). Retrieved from http://www.sec.gov/about/laws.shtml
Susan M. Gates, Kristin J. Leuschner. (2007). Do Benefits of Sarbanes-Oxley Justify the Costs? Empirical Evidence in the Case of Small Firms. Retrieved from http://www.rand.org/content/dam/rand/pubs/research_briefs/2007/RAND_RB9295.pdf
Willits, S. D., & Nicholls, C. (2014). Is the Sarbanes-Oxley Act Working?. CPA Journal, 84(4), 38.