The Sarbanes-Oxley Act of 2002 requires public companies to document and test their internal control structure to ensure the minimization of fraud within the company. It also requires the public company’s external auditor to test those controls and then issue an opinion on the effectiveness of the internal control structure over financial reporting.
The Sarbanes-Oxley Act of 2002 was largely the result of the financial reporting failures of Enron, WorldCom, Waste Management, and others. The utopian goal of the law was to obviously prevent another Enron or WorldCom. The overlooked effect was the exorbitant cost of compliance. According to FEI surveys, the cost of compliance has soared 62% from original estimates. An FEI survey conducted in July 2004 of 224 public companies with average revenues of $2.5 billion found that the average cost of compliance to be estimated at $3.14 million.
This may sound minuscule compared to $2.5 billion in revenues, but smaller public companies with much less revenue will no doubt suffer from this burden. It may force smaller public companies to seriously consider ways to take the company private.
Many of you may be wondering… “How does this affect my investments?” Simply put, when the external auditors begin to issue opinions on the internal controls of their public company clients it is entirely unclear how the markets will react. If a company receives a clean opinion, will its stock soar? If a company receives an adverse, or disclaimer of opinion, will its stock drop dramatically? All of this is unclear. Most of the large financial networks such as CNBC rarely cover anything to do with Sarbanes-Oxley compliance and its effects on stock price. This only continues to promote ignorance on the part of the average investor.
The dilemma we face is if markets do not react, then companies will not take Sarbanes-Oxley compliance very seriously. However, are large fluctuations in the market worth it? Is the risk of fraud really that great? Will Sarbanes-Oxley compliance really protect the average investor? All these questions seem to be unanswered.
This article is strongly requesting your feedback. We want to hear from the average investor.
We especially welcome public accountants and stock analysts to share their opinions on this matter.
Please post your comments in order to help the average investor gauge the effects of Sarbanes-Oxley. Click Comments Link to Post Comments.
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SmarPros - Covers Cost of Compliance
I am a CPA working at one of the big firms in California. The article does raise some interesting questions, however what it does not mention is that for small publics, 404 is neither particularly useful nor efficient because the risk is not necessarily in the controls themselves, but journals entries going through which move amounts that maybe should not be there!
ReplyDeleteSteven Collins
Though Sarbanes does benefit the accounting firms who are receiving extremely high revenues for all of the 404 work being performed, I must say that I do not believe that it will ultimately benefit the companies or investors as a whole. You see, by being required to have the work done, public companies, both small and large, are being coerced into spending ridiculous amounts of money to ensure that their "controls" are all up to par...and for the most part, I'm fairly confident that the outcome for most companies when the 404 work is all done will be a clean opinion from the firms. So where does this leave us? The effect on investors will be miniscule...if anything, the confidence that they once had in the companies that they are investing in will be re-affirmed. And as for the companies themselves...they have not only lost out on the money paid directly for the services rendered by the firms, but they have also lost out on all of the time and labor that was internally put into getting it all done. In plain words, these companies are being wrongfully punished for the faults of Enron, Worldcom, etc.
ReplyDelete404 is poopy!
ReplyDeleteSteven Collins is not a CPA in the United States...His opinion is worthless!
ReplyDeleteneedles blurp twenty not snickety.
ReplyDelete