Sarbines Oxley Act - a Solution or a Problem

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Although Sarbanes Oxley Act was formed for the aim of increasing investors’ confidence and financial statements’ reliability, the cost of implementing it was significantly rough. As endorsed, Sarbanes Oxley Act has enlarged the mandatory services from the companies in order to conform to its requirements. SEC postulated an approximation that the extra workload compulsory to satisfy Sarbanes Oxley ACT would be five hundred extra man hours (Dowling &Jahmani, 2008). “The new estimate to comply with Sarbanes Oxley Act was an additional 383 man hours with an estimated dollar value of $91,000 excluding the auditing fees per company per year” (Dowling &Jahmani, 2008, p.60). In fact, according to Franklin (2016), “the cost of compliance at the timedid not include just fees paid to external auditors to conduct the actual required procedures under the act,but also that of the internal auditors within the company to assist in assurance that controls were incompliance with the guidelines of Section 404 prior to the external audit” (p.58). Also, Franklin (2016) implied that “the focus of internal auditors inmany companies needed to shift from functions such as cost recoveries and consulting, and this shift oftenresulted in the hiring of additional internal audit staff to maintain these important activities” (p.58-59). Adding to that, the audit fees had increasedafter 2002 (Asthana, Balsam, & Kim, 2002). Furthermore, Big Four audit firms have enlarged their audits fees which made their clients face additional and heavy fees (Asthana, Balsam, & Kim, 2002). The audit fees have just reached 50% increase between 2003 and 2004 (Franklin, 2016). Therefore, this increase seems to have a heavy pressure on the operating expenses of most corporations. Moreover, it was discovered that the accumulative abnormal return was expressively negative signifying that the market concerns SOX as a net struggle on the performance and revaluation of the company (Zhang, 2007). Therefore, there was a decrease in market value and a loss of almost $1.4 billion (Zhang, 2007). Also, the impact the compliance with Sarbanes Oxley Act has also resulted in indirect costs. These indirect costs consist of opportunity costs, lost investment opportunities, and excessive staff burdens. The loss of investment opportunities has driven public companies to withdraw from the US stock exchange and move into London stock exchange because it demands compliance with less rules and regulations(Dowling &Jahmani, 2008). Generally, it seems that the major trigger to move from the public sector into private was the compliance costs. Adding to the loss of investment opportunities, companies also suffered from material opportunity costs. “Executives expected that they would have to devote as much as 10% percent of their time in complying with the certifications and internal control assessment reporting required by SOX” (Dowling &Jahmani, 2008, p.61). The management executives must focus comprehensively on SOX conformity which will cost him less time on other strategic activities and decisions(Dowling &Jahmani, 2008). “SOX has been the additional burden placed on finance departments when they are trying to balance the priorities of day-to-day operations and the time required for the increased documentations and reporting requirements” (Dowling &Jahmani, 2008, p.61). This burden has added stress and anxiety to these departments. “Nevertheless, some companies are starting to realize that the additional effort required by SOX compliance demands that additional hires be made in those departments most affected by SOX compliance” (Dowling &Jahmani, 2008, p.61). Moreover, Sarbanes Oxley Act weakens the incentive alignment between shareholders and board of directors. Some regulations of Sarbanes Oxley Act have forced penalties and legal responsibilities to the CEOs. Consequently, these requirements diminish the risk-taking stimulants facing executive directors (Chang, Choy, & Wan, 2012). In addition, the weak incentive alignment between the executive directors and the shareholders appears in the decrease of equity ownership and the total pay-performance of CEOs. “Specifically, shareholders pay CEOs less in incentive pay; however, CEOs sell personal holdings of their companies’ stocks after SOX” (Chang, Choy, and Wan, 2012, p.178).

In conclusion, compliance with SOX forces major costs which could result in measurable incremental workloads, prolonged amounts of paperwork, large amounts of cash flows, weakened relation between shareholders and CEOs, and the promotion of a new governmental bureaucracy. Despite the direct and indirect costs, companies may cover or undergo the expensiveoperation process of Sarbanes Oxley Act compliance through corporate learning and thus opportunities for cost depression may appear. The continuous and significant costs of complianceare in fact declining as employees are becoming more familiar and knowledgeable of the recommendations of Sarbanes Oxley Act's conditions. Employees should have full knowledge of Sarbanes Oxley Act’s consequences and recommendations in order to take early alternatives and cautions. Furthermore, companies should simplify more their system and processes and distribute properly the recourses in order to avoid any complexity and high compliance costs. As a reminder, Sarbanes Oxley act was settled for the purpose of supporting the reliability of the financial statements and internal controls in order increase the investors’ confidence of the market.Without the investing resulting from the public’s trust, our securities markets would stop to operate and the economic stability will decline because securities markets are the engine of the national wealth. The crucialassessment of Section 404, and of those responsible ofexecuting, is whether there is a material and significant success in preserving the public’s confidence in the reliability and lucidity of those markets. In general, we must consider that Sarbanes Oxley Act is the influence of damaging scandals like Enron, WorldCom, and more. These scandals have ruined the lives many employees, caused bankruptcy of many companies and investors, and mainly ruined the economy. Therefore, in order to fix the ruins, we might still face costs but this should not affect the main purpose which is boosting the economy and avoiding fraud as possible.

References

Asthana, S., Balsam, S., & Kim, S. (2009). The effect of Enron, Andersen, and Sarbanes Oxley on the US market for audit services.Accounting Research Journal, 22(1), 4-26.

Chang, H., Choy, H., & Wan, K. (2012, February).Effect of the Sarbanes-Oxley act on CEOs’ stock ownership and pay-performance sensitivity.Review of quantitative Finance and Accounting, 38(2), 177-207.