Sarbanes Oxley Act (SOX) Highlights

Posted on September 28, 2011 by Bill Faiferlick

The affects on smaller non-public businesses:

  • On June 30, 2002 in response to major corporate accounting scandals commonly remembered as EnronTyco InternationalAdelphia,Peregrine Systems and WorldCom, the U.S. government passed legislation under The Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act of 2002. It was commonly understood that there was a need to better regulate and hold the accounting industry accountable. These scandals cost investors billions of dollars when the share prices of the affected companies collapsed not to mention the employees’ lives that were devastated with the loss of well-paying jobs. The overshadowing issue was the loss in confidence in the U.S.’ securities markets.
  • The legislation established enhanced standards for all U.S. public companyboards, management, and public accounting firms and even private companies are discovering they need to comply with SOX. This is especially evident as record numbers of boomers are selling or turning their businesses over to next generation family members. The law intensifies regulation of corporate finances and governance. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.
  • The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditorindependence, corporate governanceinternal control assessment, and enhanced financial disclosure. – (Source: Wikipedia).

Debate continues over the perceived benefits and costs of SOX

  • Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation’s capital markets by, among other things, strengthening corporate accounting controls (that was until the fall of 2008).
  • Opponents of the bill claim that it has reduced America’s international competitive edge against foreign financial service providers, claiming that SOX has introduced an overly complex and regulatory environment into U.S. financial markets.

My comments

  • If Sarbanes Oxley were effective, the question that arises is how are the recent bank and investment firm failures and insolvencies of Bear Sterns, Lehman Brothers, AIG, WaMu possible. If laws were enforced the heightened oversight and greater transparency to improve confidence in the US Securities’ market should have prevented the current financial fiasco.
  • Sarbanes Oxley has put expensive compliance on small businesses wishing to expand. For businesses who may eventually seek to go public, it has meant that in trying to comply with expanded compliance related requirements, the cost has increased to a level that actually works to limit the number of public offerings. It’s almost unaffordable with these new standards,; yet we’ve still seen the collapse of 100 year old firms. If the SEC cannot manage the current oversight requirements, new laws increasing the work loads of overworked and under-funded governmental departments is more window dressing than substantive legislation.

Links to read more about Sarbanes Oxley:

Newt Gingrich: Kill Sarbanes-Oxley

SEC Announces Next Steps for Sarbanes-Oxley Implementation

Effectiveness of Sarbanes-Oxley still debated