The Cost-Benefits of Sarbanes–Oxley Analysis
The cost-benefits of Sarbanes–Oxley Analysis
In response to the collapse of a number of high-profile firms since late 2001, Congress passed the Sarbanes-Oxley Act in July 2002 to enhance corporate governance and thereby restore public confidence. The Act has introduced significant changes in both management’s reporting responsibilities and the scope and nature of the responsibilities of the auditor. When President Bush signed the Act into law, he characterized it as “the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt.”
Ever since the passage of the Act, the business community has expressed substantial concerns for its costs of compliance. According to a study by Financial Executives International, SOX costs about $824,000 for companies with annual revenues under $100 million, compared with about $1.5 million for companies with sales of $100 million to $500 million.
Compliance costs
According to Foley & Lardner Survey (2007), there 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 as show in the following figures.
The Cost of Being Public for Companies with Annual Revenue under $1 Billion | | Estimated FY 2002 | Estimated FY 2003 | Estimated FY 2004 | Item | Before Reform | Costs [% Change] | Costs [% Change] | Costs [% Change] | D&O Insurance | $ 329,000 | $ 639,000 | +94% | $ 850,000 | +33% | $ 407,000 | -52% | Audit | $ 319,000 | $ 427,000 | +34% | $ 505,000 | +18% | $ 1,058,000 | +110% | Legal | $ 212,000 | $ 404,000 | +91% | $ 468,000 | +16% | $ 213,000 | -54% | Board Compensation | $ 107,000 | $ 212,000 | +98% | $ 313,000 | +48% | $ 222,000 | -29% | lost
In response to the collapse of a number of high-profile firms since late 2001, Congress passed the Sarbanes-Oxley Act in July 2002 to enhance corporate governance and thereby restore public confidence. The Act has introduced significant changes in both management’s reporting responsibilities and the scope and nature of the responsibilities of the auditor. When President Bush signed the Act into law, he characterized it as “the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt.”
Ever since the passage of the Act, the business community has expressed substantial concerns for its costs of compliance. According to a study by Financial Executives International, SOX costs about $824,000 for companies with annual revenues under $100 million, compared with about $1.5 million for companies with sales of $100 million to $500 million.
Compliance costs
According to Foley & Lardner Survey (2007), there 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 as show in the following figures.
The Cost of Being Public for Companies with Annual Revenue under $1 Billion | | Estimated FY 2002 | Estimated FY 2003 | Estimated FY 2004 | Item | Before Reform | Costs [% Change] | Costs [% Change] | Costs [% Change] | D&O Insurance | $ 329,000 | $ 639,000 | +94% | $ 850,000 | +33% | $ 407,000 | -52% | Audit | $ 319,000 | $ 427,000 | +34% | $ 505,000 | +18% | $ 1,058,000 | +110% | Legal | $ 212,000 | $ 404,000 | +91% | $ 468,000 | +16% | $ 213,000 | -54% | Board Compensation | $ 107,000 | $ 212,000 | +98% | $ 313,000 | +48% | $ 222,000 | -29% | lost
References: Thomas E. Hartman. (2007). The Cost of Being Public in the Era of Sarbanes-Oxley. http://www.foley.com/files/tbl_s31Publications/FileUpload137/3736/Foley2007SOXstudy.pdf