The Impact Of SOX On Public Companies
The well-known failures of Enron, Global Crossing and WorldCom, along with the exposure of financial irregularities forced Congress to enact the Sarbanes – Oxley Act (SOX) in 2002. SOX effected noteworthy changes in both the auditing responsibilities and the management’s reporting responsibilities.
By the end of 2004, most of the public companies worked diligently to comply with the requirements of the Sarbanes-Oxley Act, 2002.The Sarbanes-Oxley act entails various filings and a number of internal actions to be taken by companies who want to comply with the regulations.
The SOX compliance is quite expensive to implement, hence it has not received a warm welcome by the corporate sector. Different sections of the Sarbanes-Oxley act have various conditions that need to be fulfilled by companies, which relate to internal as well as external audits.
Both the government as well as corporate America agree that the restoration of investor confidence is in the best interest of the economy, investors, and corporations that are publicly traded. But they do not agree about how much SOX compliance actually costs. The ultimate aim of SOX is to create an ethical and moral corporate environment. Though, to what extent SOX can create this environment is not clear, it will definitely play a vital role in the implementation. Cost of compliance as well as long term benefits of SOX are the major issues that have engulfed the US financial markets, investors and other concerned parties.
The cost of compliance and its impact
The costs of internal control system improvements, costs of personal liability obligations, as well as the overall costs that the US financial markets have to bear are all substantial effects of SOX compliance. Because of the substantial new requirements, corporate directors are increasingly liable to incur personal, civil and criminal charges. Hence, the SOX compliance has resulted in increased legal expenditure, outsourcing costs and insurance premiums in order to monitor the audits that are necessary within each organization.
Also, the additional costs borne by auditors are passed on to their corporate clients. Not all corporates are ready to bear this additional burden. The increased responsibility of directors, promoters and other high officials has had its impact on the overall functioning of organizations.
So in the post-SOX corporate scene, companies and directors have become more cautious about their decisions, and the various costs attached to their decisions. The tighter internal controls and increased scrutiny has its advantages, but it also results in slow decision-making, which eventually causes delays in the implementation. While SOX has certainly raised the levels of corporate disclosure, the readjustment costs however may not be useful for the company in their global endeavors. An increase in internal checks and controls leads to delaying the response time to customers.
Due to the stringent regulations of SOX, many small and medium public companies in the US are seriously re-considering going public. As per the sections 302 and 404, public companies are forced to investigate their own shortfalls and sort them out. This has to be done through a detailed audit, with a reporting statement. Many public companies find it difficult to allocate time and money for SOX compliance activities.
In the short run, the cost of SOX compliance plays havoc on public companies. It forces many companies to take the private route. But this too has its share of merits and demerits. Financially weaker companies remain under the scanner for a long time.
If SOX compliance costs decline over time, and global markets adopt a similar version of SOX, the US economy can reap rich benefits, as increased productivity and wealth.