Auditors and consultants around the country would like to string me up for my vocal dislike of Sarbanes-Oxley. I frequently moan that the cost is too high, the results are too poor, and consumers are fooled into thinking there’s been a solution to the fraud problem when there hasn’t.
But Sarbanes-Oxley consulting is a billion-dollar industry.A 2003 study indicated that the total annual cost of complying with Section 404 of Sarbanes Oxley was over $1 billion. An average company spent $1.7 million on SOX compliance last year.
Auditors and consultants aren’t stupid. That’s a cash cow for them, and they don’t want to lose it.
But The Corporate Counsel is reporting that Sarbanes-Oxley could go down the tubes based upon a pending decision in Free Enterprise v. PCAOB. The Race to the Bottom has a nice summary of some of the arguments in this case. Simply put, there are professionals who think this case could put the kabosh on PCAOB and Sarbanes-Oxley.
Professionals can argue that there have been some positive benefits from SOX, and I don’t disagree. For companies that decided to use it as a tool to improve controls, it has provided a benefit. But overall, I believe the cost has been too large and the benefits have been too small.
SOX was supposed to help protect investors in public companies. In many ways, I think it has done the opposite. Many investors have been taken off their guard, wrongly believing that SOX has been effective in reducing fraud. That’s simply not the case. I’ve yet to see any proof of a measurable decrease in corporate fraud since Sarbanes-Oxley was implemented. I’m willing to see what the world is like without SOX.
Thanks to Francine McKenna for the link to The Corporate Counsel.
Sarbanes Oxley was designed to prevent and curtail fraud.
While millions have been spent; the legislation missed the #1 risk
exposure. Over 1500 publicly traded corporations self insure for their
employees healthcare benefits. Claims are paid with corporate assets
rather than purchasing insurance. These firms outsource the payment
of claims to third party administrators. The administrators have access
to the corporate check book with no oversight.
90% of employee hospital bills contain billing errors; yet no one
in the corporation knows what the correct price should be
Hundreds of CEO’s and CFO’s have certified the adequacy of internal
accounting controls; when in fact their internal audit team are clueless.
IF SOX was enforced; many corporations would add $400 per employee
in pre tax cash flow as a function of reduced healthcare costs.
I worked as the head of the SOX efforts for a public company for several years. I can tell you without a shadow of a doubt that Section 404 was a complete was of time, money, and many other valuable resources for us. It did absolutely nothing to prevent or deter the kind of fraud that could bring the Company to an earth-shaddering end. Sure, there were extremely small (tiny) benefits related to some controls but with the cost in the millions, it would have been way cheaper to leave these controls unchecked. The fact is that is high level executives want to commit fraud, SOX404 is not going to do anything to stop them.
Many of the other provisions of SOX are good and reletively easy and cheap to implement. For example, the corporate whistleblower line and others.
It seems to me, the only people who like SOX are some Politicians, Auditors, and Consultants. The Politicians like it because they can talk about how it is preventing fraud and that they are doing their job in protecting Americans. Auditors and Consultants like it due to the obvious economic benefits.
I will say that many of these Auditors and Consultants are quick to agree (behind closed doors) that the whole process is a waste of time and is in no way cost effective to anyone.