Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (USStatute|107|204|116|745|2002|07|30), also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; is a United States federal law enacted on July 30, 2002 in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation's securities markets. Named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), the Act was approved by the House by a vote of [http://clerk.house.gov/evs/2002/roll110.xml 334-90] and by the Senate [http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=107&session=2&vote=00192 99-0] . President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." [ (Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud in Corporations", "The New York Times", July 31, 2002, page A1). ]

The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It does not apply to privately held companies. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Debate continues over the perceived benefits and costs of SOX. Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation's capital markets by, among other things, strengthening corporate accounting controls. Opponents of the bill claim that it has reduced America's international competitive edge against foreign financial service providers, claiming that SOX has introduced an overly complex and regulatory environment into U.S. financial markets. [A Mckinsey & Company study commissioned by NYC Mayor Bloomberg and NY Senator Charles Schumer cites this as one reason that America's financial sector is losing market share to other financial centers around the world. Reference http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/2007/NY_REPORT%20_FINAL.pdf ]

The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

Overview

Sarbanes-Oxley contains 11 titles that describe specific mandates and requirements for financial reporting. Each title consists of several sections, summarized below.

*1) Public Company Accounting Oversight Board (PCAOB)::Title I consists of nine sections and establishes the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services ("auditors"). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX.

*2) Auditor Independence::Title II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.

*3) Corporate Responsibility::Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company's "principal officers" (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly.

*4) Enhanced Financial Disclosures::Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports.

*5) Analyst Conflicts of Interest::Title V consists of only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.

*6) Commission Resources and Authority::Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, adviser or dealer.

*7) Studies and Reports::Title VII consists of five sections and are concerned with conducting research for enforcing actions against violations by the SEC registrants (companies) and auditors. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations and enforcement actions, and whether investment banks assisted Enron, Global Crossing and others to manipulate earnings and obfuscate true financial conditions.

*8) Corporate and Criminal Fraud Accountability::Title VIII consists of seven sections and it also referred to as the "“Corporate and Criminal Fraud Act of 2002"”. It describes specific criminal penalties for fraud by manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers.

*9) White Collar Crime Penalty Enhancement::Title IX consists of two sections. This section is also called the "“White Collar Crime Penalty Enhancement Act of 2002.”" This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.

*10) Corporate Tax Returns::Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return.

*11) Corporate Fraud Accountability::Title XI consists of seven sections. Section 1101 recommends a name for this title as "“Corporate Fraud Accountability Act of 2002”". It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC to temporarily freeze large or unusual payments.

History and Context: events contributing to the adoption of SOX

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron (see Enron scandal), WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002. [Farrell, Greg. "America Robbed Blind." Wizard Academy Press: 2005] In a 2004 interview, Senator Paul Sarbanes stated: Cquote|The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value. The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify...The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission. [ [http://findarticles.com/p/articles/mi_m0NXD/is_1_11/ai_n25101748/print?tag=artBody;col1 Sarbanes Interview] ]

*Auditor conflicts of interest: Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line.

*Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.

*Securities analysts' conflicts of interest: The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest.

*Inadequate funding of the SEC: The SEC budget has steadily increased to nearly double the pre-SOX level. [ [http://www.sec.gov/foia/docs/budgetact.htm SEC Annual Budget] ] In the interview cited above, Sarbanes indicated that enforcement and rule-making are more effective post-SOX.

*Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well.

*Internet bubble: Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.

*Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. [ [http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt SEC Levitt Speech The Numbers Game] ] Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets.

Timeline and passage of SOX

The House passed Rep. Oxley's bill (H.R. 3763) on April 25, 2002, by a vote of 334 to 90. The House then referred the "Corporate and Auditing Accountability, Responsibility, and Transparency Act" or "CAARTA" to the Senate Banking Committee with the support of President George W. Bush and the SEC. At the time, however, the Chairman of that Committee, Senator Paul Sarbanes (D-MD), was preparing his own proposal, Senate Bill 2673.

Senator Sarbanes’s bill passed the Senate Banking Committee on June 18, 2002, by a vote of 17 to 4. On June 25, 2002, WorldCom revealed it had overstated its earnings by more than $3.8 billion during the past five quarters (15 months), primarily by improperly accounting for its operating costs. Sen. Sarbanes introduced Senate Bill 2673 to the full Senate that same day, and it passed 97-0 less than three weeks later on July 15, 2002.

The House and the Senate formed a Conference Committee to reconcile the differences between Sen. Sarbanes's bill (S. 2673) and Rep. Oxley's bill (H.R. 3763). The conference committee relied heavily on S. 2673 and “most changes made by the conference committee strengthened the prescriptions of S. 2673 or added new prescriptions.” (John T. Bostelman, The Sarbanes-Oxley Deskbook § 2-31.)

The Committee approved the final conference bill on July 24, 2002, and gave it the name "the Sarbanes-Oxley Act of 2002." The next day, both houses of Congress voted on it without change, producing an overwhelming margin of victory: [http://clerk.house.gov/cgi-bin/vote.asp?year=2002&rollnumber=348 423 to 3] in the House and [http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=107&session=2&vote=00192 99 to 0] in the Senate. On July 30, 2002, President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt." [ (Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud in Corporations", "The New York Times", July 31, 2002, page A1). ]

Analyzing the cost-benefits of Sarbanes-Oxley

A significant body of academic research and opinion exists regarding the costs and benefits of SOX, with significant differences in conclusions. This is due in part to the difficulty of isolating the impact of SOX from other variables affecting the stock market and corporate earnings. [ [http://www.economist.com/displaystory.cfm?story_id=9545905 Economist Article - "Five Years Under the Thumb"] ] Shakespeare, Catharine. "Sarbanes-Oxley Act of 2002 Five Years On: What Have We Learned?", "Journal of Business & Technology Law", July 2008, p. 333. University of Maryland School of Law] Conclusions from several of these studies and related criticism are summarized below:

* FEI Survey (Annual): Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs. These costs have continued to decline relative to revenues since 2004. The 2007 study indicated that, for 168 companies with average revenues of $4.7 billion, the average compliance costs were $1.7 million (.036% of revenue). [ [http://fei.mediaroom.com/index.php?s=43&item=204 FEI 2007 Survey of SOX 404 Costs] ] The 2006 study indicated that, for 200 companies with average revenues of $6.8 billion, the average compliance costs were $2.9 million (.043% of revenue), down 23% from 2005. Cost for decentralized companies (i.e., those with multiple segments or divisions) were considerably more than centralized companies. Survey scores related to the positive effect of SOX on investor confidence, reliability of financial statements, and fraud prevention continue to rise. However, when asked in 2006 whether the benefits of compliance with Section 404 have exceeded costs in 2006, only 22 percent agreed. [ [http://fei.mediaroom.com/index.php?s=press_releases&item=187 FEI 2006 Survey of SOX 404 Costs] ]

*Foley & Lardner Survey (2007): This annual study focused on changes in the total costs of being a U.S. public company, which were significantly affected by SOX. Such costs include external auditor fees, directors and officers (D&O) insurance, board compensation, lost productivity, and legal costs. Each of these cost categories increased significantly between FY2001-FY2006. Nearly 70% of survey respondents indicated public companies with revenues under $250 million should be exempt from SOX Section 404. [ [http://www.foley.com/news/news_detail.aspx?newsid=3074 Foley & Lardner 2007 Study] ]

* Butler/Ribstein (2006): Their book proposed a comprehensive overhaul or repeal of SOX and a variety of other reforms. For example, they indicate that investors could diversify their stock investments, efficiently managing the risk of a few catastrophic corporate failures, whether due to fraud or competition. However, if each company is required to spend a significant amount of money and resources on SOX compliance, this cost is borne across all publicly traded companies and therefore cannot be diversified away by the investor. [ [http://www.aei.org/books/bookID.855/book_detail.asp The SOX Debacle] ]

* Institute of Internal Auditors (2005): The research paper indicates that corporations have improved their internal controls and that financial statements are perceived to be more reliable. [ [http://www.theiia.org/research/research-reports/chronological-listing-research-reports/downloadable-research-reports/?i=248 IIA Research SOX Looking at the Benefits] ]

* Skaife/Collins/Kinney/Lefond (2006): This research paper indicates that borrowing costs are lower for companies that improved their internal control, by between 50 and 150 basis points (.5 to 1.5 percentage points). [ [http://www.wbur.org/news/local/icd/icd.pdf The Effect of Internal Control Deficiencies on Firm Risk and Cost of Capital] ]

* Zhang (2005): This research paper estimated SOX compliance costs as high as $1.4 trillion, by measuring changes in market value around key SOX legislative "events." This number is based on the assumption that SOX was the cause of related short-duration market value changes, which the author acknowledges as a drawback of the study. [ [http://w4.stern.nyu.edu/accounting/docs/speaker_papers/spring2005/Zhang_Ivy_Economic_Consequences_of_S_O.pdf Zhang-Economic Costs of SOX] ]
* Iliev (2007): This research paper indicated that SOX 404 indeed led to conservative reported earnings, but also reduced -- rightly or wrongly -- stock valuations of small firms. [ [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983772 The Effect of the Sarbanes-Oxley Act (Section 404) Management's Report on Audit Fees, Accruals and Stock Returns] ] Lower earnings often cause the share price to decrease.

* Lord & Benoit Report (2006): This study included a population of nearly 2,500 companies and indicated that companies with no material weaknesses in their internal controls, or companies that corrected them in a timely manner, experienced much greater increases in share prices than companies that did not. [ [http://www.section404.org/pdf/Lord%20&%20Benoit%20Report%20Do%20the%20Benefits%20of%20404%20Exceed%20the%20Cost.pdf Lord & Benoit Report] ] [ [http://www.section404.org/pdf/09_wall_street_journal.pdf Benoit WSJ] ] The report indicated that the benefits to a compliant company in share price (10% above Russell 3000 index) were greater than their SOX Section 404 costs.

The effect of SOX on non-US companies

Some have asserted that Sarbanes-Oxley legislation has helped displace business from New York to London, where the Financial Services Authority regulates the financial sector with a lighter touch. In the UK, the non-statutory Combined Code of Corporate Governance plays a somewhat similar role to SOX. However, a greater amount of resources are dedicated to enforcement of securities laws in the UK than in the US—see Howell E. Jackson & Mark J. Roe, “Public Enforcement of Securities Laws: Preliminary Evidence,” (Working Paper January 16, 2007). The Alternative Investment Market claims that its spectacular growth in listings almost entirely coincided with the Sarbanes Oxley legislation. In December 2006 Michael Bloomberg, New York's mayor, and Charles Schumer, a U.S. senator, expressed their concern. [ [http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/2007/NY_REPORT%20_FINAL.pdf Bloomberg-Schumer report] ]

The Sarbanes-Oxley Act's effect on Non-US companies cross-listed in the US is different on firms from developed and well regulated countries than on firms from less developed countries according to Kate Litvak. [ [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=876624 SSRN-The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US by Kate Litvak ] ] Companies from badly regulated countries benefit from better credit ratings by complying to regulations in a highly regulated country (USA) that is higher than the cost, but companies from developed countries only incur the cost, since transparency is adequate in their home countries as well. On the other hand, the benefit of better credit rating also comes with listing on other stock exchanges such as the London Stock Exchange.

Implementation of Key Provisions

OX Section 302: Internal control certifications

Under Sarbanes-Oxley, two separate certification sections came into effect—one civil and the other criminal. usc|15|7241 (Section 302) (civil provision); usc|18|1350 (Section 906) (criminal provision).

Section 302 of the Act mandates a set of internal procedures designed to ensure accurate financial disclosure. The signing officers must certify that they are “responsible for establishing and maintaining internal controls” and “have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared.” uscsub|15|7241|a|4. The officers must “have evaluated the effectiveness of the company’s internal controls as of a date within 90 days prior to the report” and “have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date.” "Id.".

The SEC interpreted the intention of Sec. 302 in Final Rule 33-8124. In it, the SEC defines the new term "disclosure controls and procedures", which are distinct from "internal controls over financial reporting". [http://www.sec.gov/rules/final/33-8124.htm]

Under both Section 302 and Section 404, Congress directed the SEC to promulgate regulations enforcing these provisions. (See Final Rule: Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Release No. 33-8238 (June 5,2003), available at http://www.sec.gov/rules/final/33-8238.htm.)

External auditors are required to issue an opinion on whether effective internal control over financial reporting was maintained in all material respects by management. This is in addition to the financial statement opinion regarding the accuracy of the financial statements. The requirement to issue a third opinion regarding management's assessment was removed in 2007.

OX Section 404: Assessment of internal control

The most contentious aspect of SOX is Section 404, which requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting (ICFR). This is the most costly aspect of the legislation for companies to implement, as documenting and testing important financial manual and automated controls requires enormous effort. [ [http://www.heritage.org/CDA/upload/SOX-CDA-edited-3.pdf See New Center for Data Analysis Report] ]

Under Section 404 of the Act, management is required to produce an “internal control report” as part of each annual Exchange Act report. "See" usc|15|7262. The report must affirm “the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.” uscsub|15|7262|a. The report must also “contain an assessment, as of the end of the most recent fiscal year of the Company, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.” To do this, managers are generally adopting an internal control framework such as that described in COSO.

To help alleviate the high costs of compliance, guidance and practice have continued to evolve. The Public Company Accounting Oversight Board (PCAOB) approved Auditing Standard No. 5 for public accounting firms on July 25, 2007. [ [http://www.pcaob.org/Rules/Docket_021/2007-06-12_Release_No_2007-005A.pdf PCAOB Auditing Standard No. 5] ] This standard superseded Auditing Standard No. 2, the initial guidance provided in 2004. The SEC also released its interpretive guidance [ [http://www.sec.gov/rules/interp/2007/33-8810.pdf SEC Interpretive Guidance] ] on June 27, 2007. It is generally consistent with the PCAOB's guidance, but intended to provide guidance for management. Both management and the external auditor are responsible for performing their assessment in the context of a top-down risk assessment, which requires management to base both the scope of its assessment and evidence gathered on risk. This gives management wider discretion in its assessment approach. These two standards together require management to:

* Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks;
* Understand the flow of transactions, including IT aspects, sufficient enough to identify points at which a misstatement could arise;
* Evaluate company-level (entity-level) controls, which correspond to the components of the COSO framework;
* Perform a fraud risk assessment;
* Evaluate controls designed to prevent or detect fraud, including management override of controls;
* Evaluate controls over the period-end financial reporting process;
* Scale the assessment based on the size and complexity of the company;
* Rely on management's work based on factors such as competency, objectivity, and risk;
* Conclude on the adequacy of internal control over financial reporting.

OX 404 and smaller public companies

The cost of complying with SOX 404 impacts smaller companies disproportionately, as there is a significant fixed cost involved in completing the assessment. For example, during 2004 U.S. companies with revenues exceeding $5 billion spent .06% of revenue on SOX compliance, while companies with less than $100 million in revenue spent 2.55%. [ [http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf SEC Advisory Cmte. Report - See charts on pages 33-34.] ]

This disparity is a focal point of 2007 SEC and U.S. Senate action. [ [http://dodd.senate.gov/index.php?q=node/3852 Dodd-Shelby Amendment] ] The PCAOB intends to issue further guidance to help companies scale their assessment based on company size and complexity during 2007. The SEC issued their guidance to management in June, 2007. [http://www.sec.gov/rules/interp/2007/33-8810.pdf]

After the SEC and PCAOB issued their guidance, the SEC required smaller public companies (non-accelerated filers) with fiscal years ending after December 15, 2007 to document a Management Assessment of their Internal Controls over Financial Reporting (ICFR). Outside auditors of non-accelerated filers however opine or test internal controls under PCAOB (Public Company Accounting Oversight Board) Auditing Standards for years ending after December 15, 2008. Another extension was granted by the SEC for the outside auditor assessment until years ending after December 15, 2009. The reason for the timing disparity was to address the House Committee on Small Business concern that the cost of complying with Section 404 of the Sarbanes-Oxley Act of 2002 was still unknown and could therefore be disproportionately high for smaller publicly held companies. [ [http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID978834_code607342.pdf?abstractid=978834&mirid=3 Sarbanes-Oxley: Progressive Punishment for Regressive Victimization, 44 Hous. L. Rev. 95 (2007)] ]

OX Section 802 Criminal Penalties for Violation of SOX

Section 802(a) of the SOX, uscsub|18|1519| states:

OX Section 1107 Criminal Penalties for Retaliation Against Whistleblowers

Section 1107 of the SOX uscsub|18|1513|e states: [Stephen M. Kohn, Michael D. Kohn, and David K. Colapinto (2004). Whistleblower Law: A Guide to Legal Protections for Corporate Employees. Praeger Publishers. ISBN 0-275-98127-4]

Criticism

Critics of the act, such as congressman Ron Paul contend that SOX was an unnecessary and costly government intrusion into corporate management that places U.S. corporations at a competitive disadvantage with foreign firms, driving businesses out of the United States. In an April 14, 2005 speech before the U.S. House of Representatives, Paul stated, "These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004. The reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs Sarbanes-Oxley imposes on businesses. According to a survey by Korn/Ferry International, Sarbanes-Oxley cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004., while a study by the law firm of Foley and Lardner found the Act increased costs associated with being a publicly held company by 130 percent." [ [http://www.house.gov/paul/congrec/congrec2005/cr041405.htm Repeal Sarbanes-Oxley!] Ron Paul, April 14, 2005]

Legal Challenges

A lawsuit (Free Enterprise Fund v. Public Company Accounting Oversight Board) was filed in 2006 challenging the constitutionality (legality) of the PCAOB. The complaint argues that since the PCAOB has regulatory powers over the accounting industry, its officers should be appointed by the President, rather than the SEC. [http://online.wsj.com/public/resources/documents/PCAOBcomplaint.pdf] Further, because the law lacks a "severability clause," if part of the law is judged unconstitutional, so is the remainder. If the plaintiff prevails, the U.S. Congress may have to devise a different method of officer appointment. Further, the other parts of the law may be open to revision. [ [http://www.washingtonpost.com/wp-dyn/content/article/2008/07/19/AR2008071900106.html Washington Post] ] The lawsuit was dismissed from a District Court; the decision was upheld by the Court of Appeals on August 22, 2008. [ [http://pcaob.org/News_and_Events/News/2008/08-22.aspx PCAOB News Release] ] Judge Kavanaugh, in his dissent, argued strongly against the constitutionality of the law, and The Supreme Court of the U.S. is expected to grant certiorari. [http://www.nysun.com/editorials/sell-sarbanes-oxley/84635/ NY Sun Editorial]

Legislative information

*House: USBill|107|HR|3763, H. Rept. 107-414, H. Rept. 107-610
*Senate: USBill|107|S|2673, S. Rept. 107-205
*Law: USPL|107|204, USStat|116|745

References

ee also

* Information technology audit
* Information technology controls
* Richard M. Scrushy, CEO of HealthSouth, the first executive charged and to be acquitted under Sarbanes-Oxley
* Basel accord
* Reg FD
* Contract Management
*Agency cost
*Data Loss Prevention

imilar laws in other countries

* Bill 198 - Ontario, Canada, version of Sarbanes-Oxley Act
* J-SOX - Japanese version of Sarbanes-Oxley Act
* Deutscher Corporate Governance Kodex - German Corporate Governance Codec
* CLERP9 - Australian Corporate reporting and disclosure law
* LSF ("Loi sur la Sécurité Financière") - French version of Sarbanes-Oxley Act
* L262/2005 ("Disposizioni per la tutela del risparmio e la disciplina dei mercati finanziari") - Italian version of Sarbanes-Oxley Act for financial services institutions
* King Report - South African version on Corporate Governance

External links

* [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_cong_bills&docid=f:h3763enr.tst.pdf The text of the law (PDF)] U.S. Government Printing Office
* [http://www.whitehouse.gov/news/releases/2002/07/20020730.html Signing Statement of George W. Bush]
* [http://www.sec.gov/news/studies/principlesbasedstand.htm Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System]