Sarbanes-Oxley: A Price Worth Paying? – Sumesh

After the fall out of companies like Enron and WorldCom, US government came out with laws that would restore confidence in accounting principles and public companies.  In 2002 Sarbanes- Oxley act (SOX) was passed. SOX’s initial direction to SEC was to boost up public company oversight board (PCAOB) by Jan 2003. As an independent, non-government board PCAOB’s function is to protect the interest of the investors and install public confidence in independent audit reports.  SOX have a huge impact on companies and people involved in capital formation process.  This includes, and is not limited to personals in the roles of company management, audit committee, external auditors, attorneys, security analyst and regulators. The law highlights the importance of corporate responsibility, financial disclosures, auditor’s independence and analyst’s conflict of interest.

Eight years after SOX came into existence; it’s still debatable if the law had done enough to contain corporate scandals or if the law itself is a cause for scandals as corporations try to adjust to the new environment created by the law.  A point of view can be raised if the law had bridged the gap too much between management disclosures and auditors insight. If that is the case the question arises how much information is shared and how much of it can risk companies exposure to competitive threat or to something like insider trading.  I believe the SOX law is over leveraged and it provides external entities too much legal support to probe into a corporation. An example is section 302 which says “all deficiency and material weakness in internal control have to be disclosed to audit committee and auditors”. A corporation is an entity by itself in a free market and should decide for itself what practice it should follow in light of its market position and market place preferably based on guidance’s and not by law.

The comment above doesn’t undermine the role of government in preserving a non-monopolistic even marketplace or the government’s reach to interfere in a companies practice for good reasons. However the vintage point of establishing a corporate culture or corporate responsibility from an outsider perspective many not fit the frame of any company.  A corporate culture is something that evolves over time and the guidelines for corporate responsibility should be driven from within the company rather than as a mandate of law. An example for such a mandate with no reward to a company is section 301, in which a company is required to have an audit committee with members of certain expertise. This does not provide any incentive but pushes an extra cost and regulatory compliance burden on the company. Finally, couple of company’s failures and wrong practices is no reason to punish the rest of the 99% companies that are well run.