To argue the success of the Sarbanes-Oxley Act of 2002, one can point to the strength and integrity of the capital markets and financial systems. If optimistically inclined, one could claim that the rules and procedures are quietly averting crises and major headline news.

The reality is, we just don't know.

But five years into SOX regulatory guidance, we can start to see the shapes of some unintended results materialize, like images in a fog. Surely, businesses and accounting firms have had to deal with unforeseen, operations-based problems, but there may be some unforeseen benefits developing too.

And some of the biggest benefits may be difficult to measure tangibly.


Everybody knew there would be heavy monetary costs associated with implementing SOX, and that has turned out to be the case. According to a Financial Executives International survey published in April 2006, the average cost of compliance with SOX Section 404 by major corporations was approximately $3.8 million.

This excludes the opportunity costs of a distracted management, focused on compliance-related matters instead of corporate strategy and reaching growth goals.

According to the FEI survey, companies required an average of 22,786 people hours internally to comply with Section 404 in 2005. A more unanticipated toll would be the impact that compliance had on personnel matters. A National Association of Corporate Directors online survey, conducted from December 2005 through February 2006, found that the percentage of directors who put in 200 or more hours on board work nearly doubled from 34 percent to 65 percent since the passage of Sarbanes-Oxley. Over 90 percent believe that their roles have become more challenging.

Findings in a 2006 Government Accountability Office report revealed that "smaller private companies wanting to go public were spending additional time, effort and money to convince investors that they could meet [SOX] requirements."

Additionally, the GAO reported, "From 1999 through 2004, IPOs by companies with revenues of $25 million or less decreased substantially - from 70 percent of all IPOs in 1999 to about 46 percent in 2005." SOX was one of several factors identified by the GAO as affecting this number, in addition to the general increase in direct expenses of the IPO process.

The act may be having an effect in the other direction as well. A number of public companies have recently revoked their public status in favor of becoming private companies. According to a 2006 GAO report, "The number of public companies that went private increased significantly: From 143 in 2001, to 245 in 2004, with the greatest increase occurring during 2003." This GAO report is supported by the findings of a 2006 Foley & Lardner study that found that public companies are consistently considering going private as a result of the strict governance measures of SOX.

Some larger public and foreign companies have chosen another alternative: Delisting from major U.S. stock exchanges and seeking alternative foreign exchanges.


The costs of SOX are very real and tangible, but the potential added benefits that may be materializing are often intangible and societal in nature. They are hard to measure and difficult to tie to SOX in a concrete way. This is probably why the costs of Sarbanes-Oxley compliance are often the primary focus of organizations subject to the act, and rightly so, since the costs are more easily measured and the many potential benefits are still-fuzzy suppositions.

In a study testing the correlation between the stock price returns of 605 cross-listed firms and the announcement of SOX, the researcher determined that companies based in countries with mid-level accounting standards and shareholder legal protections experienced a boost in their share prices on their listed U.S. exchange concurrent with the act's public announcement.

Additionally, in a report cited by Public Company Accounting Oversight Board member Charles Niemeier, researchers at the University of Texas concluded that a company's cost of capital was positively or negatively affected based upon whether it remediated or identified a material weakness not noted in prior unaudited periods, respectively.

With respect to enforcement actions, under the Uniform Sentencing Reform Act of 1984, penalties meted out by regulators may be reduced if evidence exists that the company implemented an effective anti-fraud program, as SOX requires.

Sarbanes-Oxley may also be contributing to broader societal benefits. These potential benefits, however, are not easy to study and validate. The act's focus on governance, ethics and regulatory compliance may play a part in many areas, including those listed below.

Increased confidence

Sarbanes-Oxley is not what motivates investors to enter the stock market. But it's possible that without SOX, more people could have stayed away from investing. In the wake of major scandals such as Enron, WorldCom and Tyco, at the same time as a major market correction, many shareholders quite possibly could have been turned off to the U.S. financial markets.

The symbolic effect of SOX may have helped to quell public concerns. In essence, the fact that the government was "doing something" may have paved the way for investors to return when they were ready to do so.


SOX obviously elevated the audit committee's role in corporate governance. And successful audit committees are constructing, and contributing to, a positive tone at the top. This, it is hoped, will positively influence rank-and-file employees. For instance, by implementing whistle-blower hotlines, the message to employees is that they are responsible for helping prevent fraud.


The supply gap in experienced auditors and accountants, accentuated by the compliance demands of SOX, is prompting public accounting firms and industry to go after untapped resources - one of which is women who may have recently left work, or who are contemplating leaving the workforce, to have a family. More firms are now offering flexible work arrangements to accommodate the needs of this group.


Not one word of SOX mentions or directs changes in accounting education. Yet accounting departments have taken it upon themselves to add more fraud and forensic accounting programs to their curricula.

The above is by no means a comprehensive list of the unintended effects of SOX. Instead, this has been a look at what may be developing within the haze, the true nature of which we will see in a few more years as we gather more data and cause-and-effect support.

The purpose and existence of SOX is not under debate here. Rather, it is the "seen" cost benefits of SOX, and the unseen consequences that are now just beginning to materialize that will ultimately determine its effectiveness and longevity.

Maria F. Boodoo, CPA, and Crystal F. Boodoo, CPA, CFE, CAMS, are senior forensic and dispute consultants within the forensic & disputes services group of Deloitte Financial Advisory Services. Reprinted with permission from The Pennsylvania CPA Journal.

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