Corporate Governance - Cost Benefit Analysis of Sarbanes Oxley

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THE BENEFITS OF SARBANES-OXLEY AND CORPORATE GOVERNANCE MEASURED AGAINST THE COSTS

Salim Motala

A research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Master of Business Administration.

14 November 2007

ABSTRACT
The Sarbanes-Oxley Act of 2002 (SOX) is the only legislated corporate governance structure, and is aimed at increasing investor confidence in public companies by forcing them to be transparent in their financial affairs. In order for companies to comply with the legislation, significant costs need to be incurred without any guarantee that the benefits will accrue to the investors or the company. The legislation will be regarded as being successful if a) the benefits and costs can be identified and b) the benefits exceed the costs.

This study reviews the SOX legislation elements using documentary and secondary interview research, and reveals a convergence between the two. While the purpose of the regulation is to prevent fraud and restore investor confidence, there was no empirical evidence suggesting that investor confidence has increased after complying with the legislation. The benefits of complying with the legislation appear to be access to capital markets in the United States, and awareness of the controls environment by all employees. The costs incurred are listed as initial implementation costs and ongoing sustainable costs, and the overall costs are greater than benefits obtained. In the long term, benefits should exceed the costs, as the sustainable costs are low compared to implementation costs.

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DECLARATION
I declare that this research project is my own, unaided work. It is submitted in partial fulfilment of the requirements of the degree of Master of Business Administration for the Gordon Institute of Business Science, University of Pretoria. It has not been submitted before for any degree or examination in any other university.

………………………………………. Salim Motala

Date: 14 November 2007

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ACKNOWLEDGEMENTS
I would like to thank the following individuals who have contributed and enabled this research project to be successfully completed:



Nick Segal, my supervisor who guided me through the process and provided insight early on in the process to keep me focused on delivering a high quality research project;



Margie Sutherland, head of MBA research at GIBS who conducted the various research workshops;

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My family and friends, for reminding me that the end is in sight; My classmates, the faculty and staff at GIBS who created an effective and challenging learning environment;



Fehmida, my wife, for her patience, support and unconditional love which allowed me the opportunity to complete the MBA; and



The Almighty.

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TABLE OF CONTENTS
ABSTRACT ........................................................................................i DECLARATION.................................................................................ii DECLARATION.................................................................................ii ACKNOWLEDGEMENTS.................................................................iii TABLE OF CONTENTS ...................................................................iv LIST OF FIGURES ...........................................................................vi LIST OF TABLES............................................................................vii 1. INTRODUCTION TO RESEARCH PROBLEM ............................1 1.1. 1.2. 1.3. 1.4. 1.5. BACKGROUND ........................................................................................ 1 RESEARCH PROBLEM ........................................................................... 2 RESEARCH AIM....................................................................................... 4 RESEARCH...
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