The Sarbanes-Oxley act was created in 2002, requiring companies to have more sufficient internal control over their financial statements. The old “I wasn’t aware of that” from executives is no longer acceptable and in fact can result in jail time for the executives and others involved. The company can also lose their exchange listing, lose of D&O insurance or face large 7+ figure fines. The act was a direct response to corporate scandals, such as WorldCom, Enron and Tyco who covered up or misrepresented questionable transactions. The scandals resulted in large losses including the closure of Enron and Arthur Anderson. This act applies to all US public companies as well as international companies that have “registered equity or debt securities with the Securities and Exchange Commission and the accounting firms that provide auditing services to them”. (Sarbanes-Oxley Essential Information)
While the intention was good, I do not feel the benefits out way the costs, particularly for smaller public companies. In an article in The CPA Journal, it lists out some of the expected costs based on a survey completed by PricewaterhouseCoopers in June 2003. The article states the direct costs associated with this act are the accounting and auditing fees. The survey estimated $2 million in first-year compliance, 12,000 hours of internal work, 3,000 hours of external work and additional audit fees of $590,000. (D'Aquila) While large companies may be able to afford these types of costs, there are smaller companies that are required to have the same standards and they do not have the money to meet these requirements. And granted, these are first year costs; there will still be costs each year associated with the external audits that are required to be performed in order to ensure compliance. Additionally there companies, and I worked for one that did not have an internal audit department. After the SOX act was passed, companies needed to have the department to be...
Cited: D 'Aquila, J. M. (n.d.). Tallying the Cost of the Sarbanes-Oxley Act. Retrieved June 14, 2011, from The CPA Journal: http://www.nysscpa.org/cpajournal/2004/1104/perspectives/p6.htm
Public Company Accounting Oversight Board. (n.d.). Retrieved June 13, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board
Sarbanes-Oxley Essential Information. (n.d.). Retrieved June 14, 2011, from SOX-online.com: http://www.sox-online.com/basics.html
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