Michael Oxley Is Not Happy With Sarbanes-Oxley

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Well that makes two of us!

In a recent article on CFO.com, retired Congressman Michael Oxley expresses his displeasure with the Sarbanes-Oxley legislation, and blames it on the Public Company Accounting Oversight Board (PCAOB).

Section 404 of the Sarbanes-Oxley Act of 2002 is the part that causes the most heartburn for executives, stockholders, and the public at-large. This section requires companies and auditors to examine internal controls over financial reporting, and to report on these controls in their annual reports. (Note, however, that companies don’t necessarily have to improve bad internal controls.)

Many say that Section 404 of Sarbox was poorly implemented and is far to expensive to companies. Oxley says the following about why companbies are unhappy with it:

The main thing is the enormous cost that was driven by the outside audit. But, the auditors are under tremendous pressure too. Audits should be risk-based so companies can better assess the risks involved and move forward.

I highly recommend reading the whole story and all of Oxley’s comments.

Some Basics About Sarbanes-Oxley

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Say it fast five times: Sarbanes-Oxley, Sarbanes-Oxley, Sarbanes-Oxley, Sarbanes-Oxley, Sarbanes-Oxley… If you’re like me, you’re sick of hearing these words.

Lots of people, however, don’t have the first idea what the Sarbanes-Oxley Act of 2002 is really about. I think the public-at-large thinks it’s legislation that stops fraud. That couldn’t be further from the truth.

It is true that Sarbanes-Oxley (also fondly referred to as SOX or SarbOx) was meant to protect investors in public companies. It set forth some standards and certain procedures that public companies are required to abide by.

But the legislation itself requires far less than many people believe it does. At the end of the day, the regulations require companies to document their processes and disclose whether or not their internal controls are working. It doesn’t actually force them to materially improve the internal controls. (See my article What Has Sarbanes-Oxley Done For You Lately? for more of my opinions on this.)

So what does Sarbanes-Oxley require? Continue reading