The Burden of the Sarbanes Oxley Act

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Financial Information Analysis:
The Burden of the Sarbanes Oxley Act

Table of Contents
Executive Summary3
Introduction4
Sarbanes Oxley Act 2002: The Burden it places on companies5
Cost of Compliance5
Cost of Finance to U.S Companies5
Fees and Audit6
Reduced Competition7
Conclusion8
References9

Executive Summary
The Sarbanes Oxley Act, named after its two main sponsors, Senator Paul Sarbanes and Congressman Mike Oxley is a legislation that must be complied by all business in the U.S. The act consists of 11 titles and 66 sections and was drafted after the stock market disaster in the 1990’s. The act has its positives and negatives but the focus on this assignment would be on the negatives mainly the burdens it puts on companies trading on the stock exchange.

Introduction
Ever since the introduction of the Sarbanes-Oxley Act (SOX) in 2002 there have been debates over the benefits and drawbacks of such a legislation. While they really isn’t much we can do about it now as its being already enforced the arguments still stands. Signed into law in July 2002, the Sarbanes Oxley Act encourages managers and auditors to ensure that the information on the financial statements were accurate. Due to this many companies have had to re-evaluate their accounting practises before subjecting those practises to the standards required by SOX.

Sarbanes Oxley Act 2002: The Burden it places on companies

Many economist and financial personnel believe it’s just another burden on business and I can’t help but listen to their dispute seeing as it was made to protect businesses from having misleading information on their accounts. It’s a funny dispute as one of Sarbanes key objectives was to restore investors’ confidence after the whole Enron scandal and others which took place. This fraudulent actions were the catalysts for this act to be enforced. Now I will try and state the negatives experienced through the initiation of the Sarbanes Oxley Act: Cost of Compliance

They are direct and indirect cost to compliance to SOX regulations such as the increase in personal liability obligations, costs associated with internal control and improvements and also the costs to the U.S financial market. A study by CRA International brought the result that in the 1st year of the SOX implementation, for larger companies (those with a value of at least $700 million), the cost of Section 404 was around the region of $8.5 million. For smaller companies (valued between $75-$700m), the average cost was near $1.2 million. Companies valued lower than $75 million have not been asked to comply with Section 404. Although Section 404 costs are supposed to significantly reduce during the 2nd year the costs are still higher than first expected, although the cost might not be high if you are a big company but for small firms the cost might seem a significant amount and their percentage in comparison to the value of the company are higher.

Cost to Financial Market: U.S Companies
The SOX is forcing many companies to consider going private due to the high costs and burdens. This could lead to less companies being traded on the stock exchange or rather than going private some companies are deregistering from exchange which is a process which takes away the need for them to disclose their financial information. These companies can still buy and sell shares however their prices will be listed on the National Quotation Bureau’s list of daily quotes for companies not trading on the stock exchange.

As a result of this fewer companies would be willing to trade in the U.S market. The SOX make trading publicly very costly for firms and the maintenance required high which also has the effect of making companies look to other means and ways to raise capital. For many foreign companies the cost of trading in the U.S market would now look bleaker thus making them hesitant so commit. Furthermore it pushes U.S investor to invest more in foreign...
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