Almost everyone agrees that the Sarbanes-Oxley Act (SOX) was a necessary and useful piece of legislation that helped restore faith in U.S. companies and their financial statements. But while no one disputes the benefits, business leaders have been complaining loudly that the costs associated with Section 404 compliance are higher than expected and an undue burden.
Passed by Congress in 2002 in the wake of the Enron and WorldCom scandals, SOX requires firms to vouch for accounting controls and disclose weaknesses to shareholders. Section 404 of the act took effect this year for U.S. companies with revenue of $75 million or more. It requires management to assess the effectiveness of internal financial controls and instructs auditors to report on whether the controls are adequate or have material weaknesses.
Some companies have complained about a big increase in what they consider unproductive auditing expenses, and business lobbyists are pushing to amend the rules. Critics contend SOX may be making executives too cautious, hindering business expansion and job growth.
Such complaints from businesses about the costs of compliance prompted U.S. auditing regulators in May to move to ease the expenses. However, regulators also said that the law has greatly benefited investors, and there is no need for Congress to revise it at this time.
Yet the complaints and the calls for changing the rule have not stopped.
Why All the Criticism?
The U.S. House Committee on Financial Services held an April 21 hearing to review the impact of SOX on businesses. Former Securities and Exchange Commission (SEC) Chairman William H. Donaldson (he resigned June 2) and Public Company Accounting Oversight Board (PCAOB) Chairman William J. McDonough testified before the committee.
"Nothing is more central to sound financial reporting than the strong internal controls contemplated by Sarbanes-Oxley. I may have heard a complaint or two about the costs, but the benefits have not been disputed," said Committee Chairman Mike Oxley. "And make no mistake, the costs associated with Section 404 are higher than anyone expected. That is a cause for concern. I am particularly sensitive to any undue burden on small and mid-size companies, whose compliance costs are a higher percentage of total revenues." (Smaller U.S. firms and foreign companies will have to comply with the law beginning in mid-2006.)
Donaldson agreed that the internal control reporting and auditing requirements require significant time and expense. "We expect that the short-term costs to improve internal control over financial reporting will, over the long-term, result in structurally sounder corporate practices and more reliable financial reporting," he said. "With these critical goals now firmly in view, calls to roll back or weaken...