This week’s Wisconsin Law Journal column takes a look at the Sarbanes-Oxley Act of 2002, which was put into law five years ago. The legislation has done some good things, but many have significant criticisms of it. The law was intended to protect retail investors in public companies by bringing certain standards to the financial reporting process.
Sarbox requires executives to certify financial results and be held accountable for the accuracy of financial data. The legislation also attempted to bring more transparency to the independent audit process.
All told, Sarbanes-Oxley was meant to help prevent fraud in public companies by requiring companies to examine their internal controls (the processes in place to ensure accurate financial reporting) and provide reports to the public. Companies don’t necessarily have to make any changes to those internal controls, so long as they are willing to report to the public that the company is deficient in this area.
While I admit that there have been some positive benefits to Sarbanes-Oxley, it’s my opinion that they come at too great a cost. Further, the legislation may make some users of financial statements complacent. They may wrongly believe that Sarbanes-Oxley does a lot to prevent fraud, and may not be expecting fraud from public companies.