The Sarbanes-Oxley Act Should Not Be Repealed

The Sarbanes-Oxley Act Should Not Be Repealed

1. Introduction.

According to Engel, Hayes, and Wang (2004), the Sarbanes-Oxley Act (SOX) has been widely criticized as being too costly and time-consuming (p.1). In addition, its excessive restrictions have driven a lot of companies out of the public capital market (Engel, Hayes & Wang, 2004, p.1). Niskanen (2006) writes that some companies have suggested the Act be repealed (p.1).

Sarbanes-Oxley Act should be changed but definitely not repealed, because it facilitates the accountability of financial information and protects investors from accounting fraud. Changes that should be made to improve SOX include reducing restrictions in certain areas, and encouraging companies to automate their internal control by exploring the possibilities in Information Technology (IT).

2.  Background.

           The Sarbanes-Oxley Act, as the reaction to scandals and collapse of several business magnates between 2000 and 2002, aimed at strengthening the accountability of Financial Reporting and audit practices (Eyden, 2012, para.2). The Act has made considerable contributions since passage. For example, Hanna (2014) presented the survey findings of Financial Executives Research Foundation in 2005 as follows: “83% of large company CFOs agreed that SOX had increased investor confidence, 33% agreed that it had reduced fraud.” (para.12).

           However, opponents insisted that SOX was too expensive and time-consuming to comply with, and its excessive restrictions have affected normal business process (Brite, 2013, para.11). In addition, the complex compliance process of SOX has driven many companies out of the public capital market (Engel, Hayes, and Wang, 2004, p.1).

3. Counterarguments and Solutions.

3.1 Companies with unqualified information should not go public in the first place.

            Due to the strict reporting requirements of SOX, the “quarterly frequency of going-private transactions has increased” (Engel, Hayes, & Wang, 2004, Abstract).  However, the core idea of SOX is to ensure the accountability of financial information. If companies go public with unreliable data, they might be harmful to the economy as a whole. Hanna (2014) referred to Srinivasan’s comment regarding this issue: “It might be beneficial to limit certain companies’ access to public financing if they cannot provide reliable information” (para.11).

3.2 The cost and efforts required by SOX are reasonable and acceptable in general.

          After interviewing more than 450 executives and professionals from different organizations, Highlights from Protiviti’s 2015 SOX Compliance Survey showed that 58% of organizations reported increase in their SOX-related external audit fees (p.7). However, in the same survey, Protiviti (2015) pointed out that external auditors are not only devoting more efforts in examining SOX compliance but also raising examining standards (p.10). That was why auditors “ were increasing related costs” (Protiviti, 2015). Considering the purpose of SOX, this is money well spent because audit quality is better guaranteed.

            Protiviti also indicated that 89% of respondents agreed that some changes needed to be made every year to comply with SOX, but basically the efforts required were limited and acceptable (p.5). Therefore, generally speaking, the costs and efforts required by SOX are reasonable to most companies. In addition, increasing the level of automation in internal control can effectively reduce the efforts required to comply with SOX. This solution will be further discussed in 3.3.

3.3 Time restrictions in certain areas such as Section 404 should be reduced.

            According to Brite (2013), one of the most controversial sections of SOX is section 404, which used to require employees to discuss internal control procedures with auditors on a quarterly basis (para.12). Although this is no longer mandatory for all companies, it’s still highly recommended by SOX to test internal control quarterly (Dawson & Valencia, 2013, para.5). However, this frequency is likely to “divert employee time and attention away from business practices” (Brite, 2013, para.12).

            To make the compliance process less burdensome, the time restriction required by SOX 404 should be reduced to annual or semiannual. By doing so, employees will have more time to focus on their jobs, and audit fees are also expected to decrease.

             Some might argue that if the frequency of being audited is reduced, so would the quality of internal control. To further tackle this problem, companies should be encouraged to increase the utilization of IT in their internal control system. Automation eliminates human errors and generates more accurate control procedures (Protiviti, 2015, p.21). In addition, reports can be produced automatically for auditors to review, which relived the workload for both employees and auditors.

3.4 The personal liability of CEO and CFO should be relieved.

            According to Sweeney, SOX mandated that CEO and CFO of a company must “personally attest that there are no material misstatements or omissions in their reports” (para.17). Brite (2013) proposed that the personal responsibility of CEO and CFO should be reduced or removed (para.27). According to Brite (2013), holding CEO and CFO liable regardless of the case not only adds unnecessary burden to them, but also provides “a shield for the actual offenders”, which reduces the effectiveness in preventing misconducts (para.27). Instead, CEO and CFO should be required to supervise investigations and identify “actual offenders” if something does go wrong (Brite, 2013, para.27).

4. Conclusion

In light of the discussion above, it could be concluded that although improvements and reforms are necessary, Sarbanes-Oxley Act remains the most effective and realistic method to enhance financial reporting accountability and restore investors’ confidence. As Sweeney noted in 2012, Paul Regan claimed that SOX was not perfect, “but if we didn’t have it, misstatements would be much worse.” (para.9). With the reforms proposed and the development of IT controls, SOX will become a more reliable and mature benchmark for companies to rely on.

References

Brite, C. (2013). Is Sarbanes-Oxley a failing law? University of Chicago. Retrieved from: http://uculr.com/articles/2013/6/30/is-sarbanes-oxley-a-failing-law

Engel, E., Hayes, R. M., & Wang, X. (2007). The Sarbanes–Oxley Act and firms’ going-private decisions. Journal of Accounting and Economics, 44(1), 116-145. http://dx.doi.org/10.1016/j.jacceco.2006.07.002

Eyden, T. (2012). SOX has restored investors' confidence. Accounting web. Retrieved from: http://www.accountingweb.com/practice/practice-excellence/sox-has-restored-investors-confidence

Hanna, J. (March 10, 2014). The costs and benefits of Sarbanes-Oxley. Forbes. Retrieved from: http://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits-of-sarbanes-oxley/

Niskanen, W.A. (2006). Congress should repeal the Sarbanes-Oxley Act. CATO Institute. Retrieved from: http://www.cato.org/publications/commentary/congress-should-repeal-sarbanesoxley-act

Protiviti. (2015). Changes abound amid drive for stability and long-term value. Highlights from Protiviti’s 2015 SOX Compliance Survey. Retrieved from: http://www.protiviti.com/en-US/Documents/Surveys/2015-SOX-Compliance-Survey-Protiviti.pdf

Sweeney, P. (2012). Sarbanes-Oxley — a decade later. Financial Executives International. Retrieved from: http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2012_07/Sarbanes-Oxley--A-Decade-Later.aspx#axzz3gH0AyFpT

Valencia, C., & Dawson, K. (2013). Demystifying a mature and cost-effective SOX program. Sarbanes-Oxley Compliance Journal. Retrieved from: http://www.s-ox.com/dsp_getFeaturesDetails.cfm?CID=2752