Costs and Benefits of Sarbanes-Oxley

Costs and Benefits of Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) legislated in 2002 because of corporate financial scandal, which involved Enron, WorldCom, and Tyco International companies. Formerly, SOX provided a few provisions, and written for public companies, one provision was the Whistleblowers Act. Also SOX entails supplementary disclosure of internal accounting control practice, and internal monitoring, furthermore, chief executive officers (CEO), and chief financial officers (CFO), which SOX mandates to certify accounting disclosures. However, the costs are initially high but dissipate over time. The benefits of complying with SOX include: transparency and reliable financial reports, penalties that hold management and auditors more accountable, and better internal control procedures

In due course, SOX increase financial accountability and transparency in an attempt to reestablish investor confidence, and SOX enactment has been effective but many uncertainties if benefits offset costs. Therefore, this paper will elaborate on costs benefit of SOX, and why SOX did not identify the present financial crisis.

Benefits and Costs

The benefits of SOX go to investors who have a reasonable assurance of fair and honest financial reporting from the corporations in which they invest. The corporations that must comply with SOX bear the largest burden of the increased costs. Each publicly traded corporation must have their financial reports audited annually by a registered public accounting firm. Public accounting firms must register with the Public Company Accounting Oversight Board (PCAOB). This registration requires an initial fee and annual renewal fees to cover the cost of processing and reviewing applications and annual reports from the public accounting firms.

Corporations must also bear some lesser-known costs for SOX compliance, including the implementation of a Code of Ethics for senior financial officers, internal controls for the production of financial statements, and increased retention time for related records, such as electronic mail and related files. The cost for these items may vary from a few thousand to many thousands of dollars (SOX-online: The Vendor Neutral Sarbanes-Oxley Site, 2006).

SOX did not identify the Present Financial Crisis.

The primary reasons for the financial crisis incorporate how banks held mortgages and the securities backing them. When the housing bubble burst, banks which overleveraged became insolvent. Securitizing the mortgages allowed the credit markets to expand quickly whereas banks were selling bad mortgages to investors (Acharya & Richardson, 2009). According to an interview with Oxley, the point of the bill was to help with transparency in corporate accounting. He further went on to say that the size of the market makes this difficult and that