Cassandra's warnings were unheeded, but they weren't false. Stephen Bainbridge brings Cassandra to mind in his discussion of Sarbanes-Oxley:br>
While we thus don’t know whether SOX in fact benefits the economy, we do know that it has imposed a much higher regulatory burden on U.S. public corporations than the law’s sponsors ever imagined. According to The Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30 percent, or even more, due to the tougher audit and accounting standards imposed by SOX.
The chief regulatory culprit is SOX section 404, which requires both management and the company’s outside auditors to annually assess the firm’s internal controls over financial disclosures. The Securities and Exchange Commission initially estimated that section 404 compliance would require only 383 staff hours per company per year.
According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues spend an average of $4.7 million per year to comply with section 404.
"Oh, that's not so bad," I can hear the rejoinders already. "Business can afford that kind of thing. They'll find a way; that's what business is for."
To be sure, some of these costs were one-time expenses incurred to bring firms’ internal controls up to snuff. Yet, many other SOX compliance costs recur year after year. For example, the internal control process required by section 404 relies heavily on ongoing documentation. As a result, firms must constantly ensure that they are creating the requisite paper trail.
In addition, other ongoing expenses imposed by SOX include legal fees, premium increases in directors and officers insurance policies, and higher director fees to attract qualified independent directors to serve on boards of directors.
These costs are disproportionately borne by smaller public firms. A study by three University of Georgia economists, for example, found that post-SOX director compensation increases have been much higher at small firms. For small firms operating on thin margins, these and related SOX compliance costs can actually make the difference between profitability and losing money.
"As a result," writes Professor Bainbridge, "SOX has substantially distorted corporate financing decisions."
Hmmm....what was that lesson again?