Since the U.S. Congress passed the Sarbanes-Oxley Act, many studies have been made to measure costs and benefits of the Act for corporations. In some studies, the Act has been shown in a negative light because of the high costs of compliance while many others have pointed out that SOX compliance benefits organizations in many significant ways. However, it`s quite difficult to make a clear judgment of the Act’s net benefits.
Most of the benefits regarding internal controls and corporate governance have been discussed in previous sections. The Act has enhanced the reliability of ?nancial reports and restored the faith of investors in the financial markets (WSJ, 2018).
In a 2005 survey done by the Financial Executives Research Foundation, 83% of large company CFOs acknowledged that SOX had enhanced investor confidence, and 33% agreed that the Act had reduced fraud (as cited in Srinivasan, 2014). In another survey conducted by the SEC in 2009, 27% of the attendant companies agreed that SOX had enhanced investor confidence, and an even higher 40% agreed that SOX had increased their confidence in other companies` financial reporting (as cited in Srinivasan, 2014).
Furthermore, in a 2013 SEC survey conducted by Alexander, et. al., 80% of the corporate insiders ascribed some benefits to Section 404 compliance, 73% of them agreed that Section 404 had a positive impact on the quality of their firm’s internal control structure, 48% agreed that Section 404 had improved the quality of their firm’s financial reporting and 47% of the respondents reported that Section 404 had enhanced their firm’s ability to prevent and detect fraud (Alexander).
Besides its benefits, SOX involves high compliance costs for corporations. SOX Section 302 and 404 represent the bulk of compliance work and most of the compliance cost arise from the installation and maintenance of an adequate Internal Control System and the increased requirements regarding the auditing process.
In the first year of implementation, Fortune 1000 firms spent, on average, a total of $7.8 million for each to implement Section 404 including the average audit fee of 1.9 million (CRA, 2005). However, SOX 404 costs have substantially reduced after initial implementation, as the IT improvements making the internal control monitoring process more efficient, and firms becoming a little more experienced and relaxed (Prentice). Additionally, in 2007, SEC issued a management guidance on how to comply with Section 404 requirements for management assessment of ICFR and its disclosure and PCAOB set new rules, with the Audit Standard 5, for the independent audit of ICFR under Section 404. These reforms have intended to reduce the compliance costs and the purported uncertainty surrounding Section 404 requirements by standardizing the compliance process (Hamilton). According to a SEC survey conducted by Alexander, et. al., the average cost of Section 404 compliance fell from $2.8 million prior to the reforms to $2.3 million in the ?rst post-reforms year (Alexander). On the other hand, the survey reported that the mean perceived net bene?ts of compliance for corporate insiders increased over time (Alexander). As stated previously, considering the scope and the content of the Act, it is not easy to make a clear calculation about its net benefits. However, considering long-term benefits stemming from improved market efficiency, better asset allocation, and fraud avoidance, these costs come to a more reasonable level (Prentice).
Sarbanes-Oxley has forever changed corporate America. The Act has made a monumental impact on all public corporations through a series of reformist provisions from financial disclosures to internal controls and audit. Coming afterward several financial scandals in the early 2000s, SOX sought to empower regulators, auditors, and corporate boards to improve the reliability of the public companies’ financial reporting, reduce fraud and restore investor confidence (Srinivasan).
Obviously, the Act has affected corporations in many significant ways. However, the most profound impact was felt in the internal control systems and the external audit services. The Sarbanes-Oxley Act has caused many companies to change governance practices, financial reporting methods, and internal control structure. Most of the reformist changes came from Sections 302 and 404. These sections also involve the most expensive and time-consuming provisions of the Act. Although the Sarbanes-Oxley Act entail a significant amount of costs, the evidence regarding its effects on corporations and financial markets are overwhelmingly positive.