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"SOX", for Short
By Peter H. Burgher Email: email@example.com
Has the Sarbanes-Oxley Act (shortened by financial writers to "The SOX") achieved what congress sought when the law was passed in a frenzy following a series of business disasters? Let's look at the record as compiled from articles in the Wall Street Journal and other sources:
- Annual bill for complying with SOX section 404, Fortune 1000 companies only - $6 billion.
- Cash cost of paperwork to comply with SOX, typical small public company - $150K.
- Cost of D&O insurance per year per company, average for all sizes -$100K.
- Increase in audit fees on the average for all public companies - 50%.
- Number of companies unable to file timely quarterly SEC reports at Sept. 30 - 600.
- Reduction in the price of a seat on the New York Stock Exchange in one year - 28%.
- Same price reduction since 1999 - 59%
- Number of companies "going private" since SOX became law - uncounted, alleged to be hundreds, maybe thousands.
In an article in WSJ, Holman Jenkins pointed out that SOX has caused audit firms to seem to be something they have never intended to be, "namely proof against fraud". This is a classic case of congress fighting the last war. The pre-occupation with low level detail has been a boon for auditor's revenues but it has completely missed the point and shows that no one learned from Sunbeam, Enron and World Com. The major frauds originated in top managements. From Bar Chris to Crazy Eddie to Global Crossing it was not the folks in the trenches that conceived and carried out the schemes or ill-gotten business methods causing losses, it was top management. SOX ignores this overriding fact.
James Turley, CEO of Ernst & Young, opined in a WSJ op-ed piece
that there will be many more disclosures of internal control weaknesses in this
year's section 404 reports than the public expects. He warns of the danger of
over reaction, likening such reports to the minor causes sometimes found from
the check engine light on your car's dashboard. He probably knows something
we don't know---yet. It is likely there are more screw-ups in the details than
a perfection seeking public can comprehend or evaluate.
But it is overwhelmingly not in the details that major frauds are caused. Handing the audit firms life and death power over companies and their managements' control systems is not going to stop fraud. Nor will it overcome the effects of markets willing to throw money at speculative and foolish ventures - legislatures have not been successful at taming bubbles, ponzi schemes or tulip mania.
SOX is the real fraud, a lot of money is being thrown at the wrong problem. More is being lost as a consequence of the law's effects. Hiring more accountants cannot take the place of high level focus on policy, judgement and strategy. Clerks will do what management tells them - it's what management tells them, not what the clerks do, that counts.