The Sarbanes-Oxley Act: a Cost-Benefit Analysis Using the U.S. Banking Industry

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The Journal of Applied Business Research – January/February 2010

Volume 26, Number 1

The Sarbanes-Oxley Act: A Cost-Benefit Analysis Using The U.S. Banking Industry Philip H. Siegel, Augusta State University, USA David P. Franz, San Francisco State University, USA John O’Shaughnessy, San Francisco State University, USA

ABSTRACT There are many analyses of the economic effects that regulations, in general, and Sarbanes-Oxley Act, in particular, have had on American business. This analysis looks at the effect that the Sarbanes-Oxley Act has had on the American banking industry. The return on assets and return on equity were obtained from the Federal Reserve Bank for all SEC-registered and nonregistered banks for the period 2000 through 2005. Comparative results indicate that during the period that the Act had been in effect there is a marked negative divergence for SEC-registered banks as opposed to those banks that do not report to the SEC.

INTRODUCTION

G

overnment regulations can have profound effects on industry. Regulation can be defined as the government directly ―prescribing and proscribing what private sector agents can and cannot do, so that their actions do not contradict the 'public interest.'‖ (Chang, 1997) Prescribing or proscribing actions can be both productive and costly for a firm as well as the public. The resulting regulations of the 2002 Sarbanes-Oxley Act (SOX) have been described as being costly to U. S. business. By comparing the returns on assets (ROA) and returns on equity (ROE) of registered (SEC reporting) vs nonregistered (nonSEC reporting) U.S. banks, this study attempts to determine if SOX has had a detrimental effect on registered banks. The Economic Effect of Regulations Benston (1976) discussed the U.S. experience of industry regulation. He noted that once power is granted to a ―regulatory agency, they almost never contract and almost always expand, regardless of their demonstrated lack of efficacy for solving problems or propensity to create new problems.‖ This is mirrored by Joshi, Krishnan, and Lave (2001), Meyer (1975), and Peterson (1975) found that higher costs are usually associated with a regulated environment and that sometimes, the regulatory costs are not worth the benefits. This is also suggested in Hahn’s (1998) research. Regulatory policies can have a detrimental economic effect for entire industries as well as the U.S. economy. Analyses of U. S. regulations indicate that they hinder American railroads, insurance industry, and public utilities (Caves, Christensen and Johnson, 1981), (Darby, 2007), (Taggart, 1985), (Pociask and Fuhr, 2007). Regarding the U.S. economy, according to Gray (1987) OSHA and EPA regulations were responsible for over 30 percent of the economic slowdown in the 1970’s. Over-regulation (Harvard Law Review 2003) can become counterproductive. Companies can become routinized in regulatory compliance in such a manner that they are adhering to the letter of the law but not the spirit. Niskanen (2007) theorized that the U.S. capital markets may be dangerously over-regulated. He cites two recent reports: the Committee on Capital Markets Regulation’s report documenting the declining U.S. competitiveness and the Schumer-Bloomberg Report which warned that U.S. financial service revenues would fall between $15 billion and $30 billion a year without a major change in the public policies affecting US capital markets.

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The Journal of Applied Business Research – January/February 2010 Regulations Concerning Accounting

Volume 26, Number 1

Regulations also appear in the form of required accounting disclosure and can produce beneficial effects. A company’s credibility can be enhanced by consistent and effective disclosure (Gibbins, Richardson, and Waterhouse, 1990). Increased disclosure benefits firms and the capital markets (Leuz and Verrecchia, 2000), (Dhaliwal, 1979), (Meier-Schatz, 1986). On the other hand mandatory disclosure can be...
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