Sarbanes Oxley — SOX as it is known for short (along with some other names I can’t mention on a PG-rated business blog) — is a federal U.S. law that was passed after the Enron scandal as a way to crack down on Corporate fraud. It imposes strict financial recordkeeping, auditing and reporting requirements.
Since the law’s passage, a growing group from academia and business have criticized it, especially when it comes to small businesses. The latest person to criticize the law is Elliot Spitzer, U.S. Attorney General for the state of New York, as this Reuter’s report notes:
New York Attorney General Eliot Spitzer on Tuesday joined the chorus claiming that stricter rules under Sarbanes-Oxley legislation may have gone too far and are hurting smaller companies.
“We’ve seen some unintended consequences from Sarbanes – Oxley,” said Spitzer in a meeting with the Association of American Publishers in New York. “It has created an unbelievable burden for small companies and may be preventing some initial public offerings.”
Spitzer has been called the Sheriff of Wall Street for his aggressive pursuit of corporations and individuals for alleged fraud. You could have knocked me over with a feather when I read over at the Sox First blog about Spitzer’s sentiments. He is the last person I would have guessed to be against Sarbanes Oxley. That tells you how bad the law is, when even the Sheriff says it went too far.
Perhaps this signals that enough public support has built up to reform Sarbanes Oxley.
By the way, the term “small business” used in the same mention with Sarbanes Oxley is a relative thing. Don’t let it confuse you. Sarbanes Oxley applies only to companies traded on a public stock exchange. A small publicly-traded business may have $400 Million in annual revenues, like Oglebay Norton the company where John D. Rockefeller got his start in business, that recently decided to go private due to the burden of Sox compliance. Four hundred million in revenue may be itsy-bitsy-teeny-weeny when compared to corporations on the Fortune 500 list, true. (Companies on the Fortune 500 have annual revenue in the billions of dollars.) But it’s not what we typically consider a “small business.”
Anita… I couldn’t agree more. For those who are interested, there are several relevant posts with links at Scatterbox regarding SOX and its impact on business.
You can see them indexed at http://del.icio.us/Best.of.Scatterbox/-Sarbanes-Oxley
The Journal Blogger
Elliot Spitzer’s comments on SOX are a bit less astonishing when you consider that he’s running for governor. 😉
I think it is a relevant point for small companies. The costs of compliance have forced many small companies to delist. Did the regulation curb potential mistatements in financial reporting equal to that of lost opportunities for companies thinking of going public?
However, I do not support a reduction in compliance with medium to large companies. The present control framework (speaking from experience) has tightened up very loose controls around financial reporting and the supporting IT subsystems and should give investors great confidence in the numbers being reported. The thrust of SOX is to make companies prove they are already performing the controls they say they are, not to levy a burdensome set of new rules. It is disengenuous to think that companies should be allowed to make claims to the accuracy of their financial statements and not provide evidence in support to remove doubt.
I would be in favor of reducing the number of yearly controls that need to be tested. Perhaps congress could approve a rotational system, often used in other types of audits, whereby segments of a company are certified as compliant on a 2-3 year basis. Given the breadth of testing and remediation done in the first 2 years of testing, this would ensure that weaknesses in higher risk areas do not go uncovered over multiple years – enough confidence for investors in and out of the US to believe in the strength of the US economy.