A report by U.S. congressional auditors has concluded that the costs of complying with the Sarbanes-Oxley Act (SOX) of 2002 have been higher than anticipated. The findings are likely to provide ammunition for further attacks on SOX by U.S. businesses, but, according to InfoWatch experts, if SOX is to be reformed, it needs to be done extremely carefully. Focusing on internal controls and cutting their costs would be far more effective.
Although the Government Accountability Office reported unexpectedly high expenditures for SOX compliance, it warned against the Securities and Exchange Commission (SEC) introducing exemptions for small public companies. The state auditors believe this would encroach on investor interests, which have been protected by SOX since 2002.
The two Republican senators who requested the report said it showed that regulators must find ways to lessen the law's effect on smaller companies. At issue is a key part of the law that requires companies to file reports on the effectiveness of their internal financial controls.
Last month an advisory committee established by the SEC to examine the issue proposed relaxing that requirement for small businesses and exempting the sector from external audits. However, such a move would affect 70% of all U.S. public companies and the senators warned against complex regulations that could lead to an increase in corporate fraud.
SEC Chairman Christopher Cox has said the goal should be to make the internal-controls requirement work so that it can apply to companies of all sizes.
The main findings to arise from the accountability office study, which was initiated in November 2004, are as follows:
For companies of all sizes, the costs of complying with the internal-controls requirement have been higher than anticipated, and they have disproportionately affected smaller companies. Many public companies have gone private to avoid having to comply with the requirement. The number of U.S. companies going private jumped from 143 in 2001 — the year before Sarbanes-Oxley was enacted — to 245 in 2004. Audit fees paid by companies have risen markedly since SOX came into force.“There have been numerous negative consequences for the U.S. as a result of SOX. It is scaring off IPOs from the NYSE and NASDAQ to the LSE, and now it is turning public companies private. However, the law has achieved its goals – the interests of investors are now reliably protected. Investigators have noted on a number of occasions that with the help of internal controls they have been able to expose huge amounts of fraud. Therefore, if SOX is to be reformed, it needs to be done very carefully. It would be better, as Christopher Cox suggests, to concentrate on internal controls and to make them cheaper,” believes Denis Zenkin, marketing director at InfoWatch.
Source: Chron.com
