The Sarbanes-Oxley Act: Six Years Later

The Sarbanes-Oxley Act came into force in 2002 and introduced major changes to the regulation of financial practice and corporate governance following scandals like the collapse of Enron. It is mandatory and all organizations – large and small – must comply. It has raised the bar for public companies, and failure to comply can result in harsh penalties. A key to compliance with this law is to implement an accounting system that offers an extensive audit trail, including extensive drill-down and drill around capabilities.

Critics have argued that the Act has damaged American competitiveness and made it less attractive for foreign companies to list in the American markets, driving initial public offerings abroad. It has also been criticized for increasing the cost for American companies without any significant benefit.

A recent study by Andrew Karolyi & Rene Stulz, both professors at Ohio State University, and Craig Doidge of the University of Toronto concludes that the facts do not support the criticism that the Act has damaged American competitiveness and made it less attractive for foreign companies to list in the American markets. The Securities and Exchange Commission (SEC) in 2007 made it easier for foreign companies to leave the United States. Until 2007, it was very difficult for a company, whether foreign or domestic, to abandon its SEC registration – a company, once it lists in the American market, could drop its listing but still had to comply with the United States disclosure requirements and accounting rules.

When a foreign company lists its shares in the American market, it benefits through lower cost of capital. Their shares trade for higher price than do those of similar companies not listed here because investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.

According to the study, the companies that did so after the SEC made it easier for them to leave the United States in 2007 did not leave the United States because of the Act but because their slow growth and poor market performance had affected their ability to attract American capital. The market did not react as if it was a good thing for shareholders when their companies got out from under the American regulation. In a few cases, the share prices fell when the foreign company leaving the United States had good market prospects.

The costs of complying with the Section 404 of the Act requiring audits of corporate internal controls have scared executive in the United States and abroad. A study by the law firm Foley & Lardner released in 2007 concludes that the cost of complying with the Act has fallen, but most of the cost savings are because of internal efficiencies at companies. Increases in audit and legal fees and a need to pay corporate directors more have added to the hefty cost of compliance.

While the Act has not damaged American competitiveness, the cost of compliance is something which is having a negative impact on American businesses.

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