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SarbanesOxley Act

in their roles as auditors of public companies. The act also


covers issues such as auditor independence, corporate
governance, internal control assessment, and enhanced nancial disclosure. The nonprot arm of Financial Executives International (FEI), Financial Executives Research
Foundation (FERF), completed extensive research studies to help support the foundations of the act.
The act was approved by the House by a vote of 423 in favor, 3 opposed, and 8 abstaining and by the Senate with a
vote of 99 in favor and 1 abstaining. President George W.
Bush signed it into law, stating it included the most farSen. Paul Sarbanes (DMD) and Rep. Michael G. Oxley (R reaching reforms of American business practices since
OH-4), the co-sponsors of the SarbanesOxley Act.
the time of Franklin D. Roosevelt. The era of low standards and false prots is over; no boardroom in America
[2]
The SarbanesOxley Act of 2002 (Pub.L. 107204, is above or beyond the law."
116 Stat. 745, enacted July 30, 2002), also known as In response to the perception that stricter nancial goverthe 'Public Company Accounting Reform and Investor nance laws are needed, SOX-type regulations were subProtection Act' (in the Senate) and 'Corporate and Audit- sequently enacted in Canada (2002), Germany (2002),
ing Accountability and Responsibility Act' (in the House) South Africa (2002), France (2003), Australia (2004),
and more commonly called SarbanesOxley, Sarbox India (2005), Japan (2006), Italy (2006), Israel, and
or SOX, is a United States federal law that set new or Turkey.(see also SarbanesOxley Act#Similar laws in
enhanced standards for all U.S. public company boards, other countries below)
management and public accounting rms. It was named
Debate continued as of 2007 over the perceived benets
after sponsors U.S. Senator Paul Sarbanes (D-MD) and
and costs of SOX. Opponents of the bill have claimed
U.S. Representative Michael G. Oxley (R-OH). As a reit has reduced Americas international competitive edge
sult of SOX, top management must individually certify
against foreign nancial service providers because it has
the accuracy of nancial information. In addition, penalintroduced an overly complex regulatory environment
ties for fraudulent nancial activity are much more seinto US nancial markets. A study commissioned by
vere. Also, SOX increased the oversight role of boards
NYC Mayor Michael Bloomberg and US Sen. Charles
of directors and the independence of the outside auSchumer, (D-NY), cited this as one reason Americas ditors who review the accuracy of corporate nancial
nancial sector is losing market share to other nancial
statements.[1]
centers worldwide.[3] Proponents of the measure said that
The bill was enacted as a reaction to a number of ma- SOX has been a godsend for improving the condence
jor corporate and accounting scandals, including those of fund managers and other investors with regard to the
aecting Enron, Tyco International, Adelphia, Peregrine veracity of corporate nancial statements.[4]
Systems, and WorldCom. These scandals cost investors
The 10th anniversary of SOX coincided with the passbillions of dollars when the share prices of aected coming of the Jumpstart Our Business Startups (JOBS) Act,
panies collapsed and shook public condence in the US
designed to give emerging companies an economic boost,
securities markets.
and cutting back on a number of regulatory requirements.
The act contains eleven titles, or sections, ranging from
additional corporate board responsibilities to criminal
penalties, and requires the Securities and Exchange Com- 1 Major elements
mission (SEC) to implement rulings on requirements to
comply with the law. Harvey Pitt, the 26th chairman of
1. Public Company Accounting Oversight Board
the SEC, led the SEC in the adoption of dozens of rules
(PCAOB)
to implement the SarbanesOxley Act. It created a new,
Title I consists of nine sections and esquasi-public agency, the Public Company Accounting
Oversight Board, or PCAOB, charged with overseeing,
tablishes the Public Company Accountregulating, inspecting, and disciplining accounting rms
ing Oversight Board, to provide inde1

1
pendent oversight of public accounting
rms providing audit services (auditors). It also creates a central oversight
board tasked with registering auditors,
dening the specic processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the
specic mandates of SOX.
2. Auditor Independence
Title II consists of nine sections and establishes standards for external auditor
independence, to limit conicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements.
It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.
3. Corporate Responsibility
Title III consists of eight sections and
mandates that senior executives take individual responsibility for the accuracy
and completeness of corporate nancial
reports. It denes the interaction of external auditors and corporate audit committees, and species the responsibility
of corporate ocers for the accuracy
and validity of corporate nancial reports. It enumerates specic limits on
the behaviors of corporate ocers and
describes specic forfeitures of benets
and civil penalties for non-compliance.
For example, Section 302 requires that
the companys principal ocers (typically the Chief Executive Ocer and
Chief Financial Ocer) certify and approve the integrity of their company nancial reports quarterly.[5]
4. Enhanced Financial Disclosures
Title IV consists of nine sections. It
describes enhanced reporting requirements for nancial transactions, including o-balance-sheet transactions, proforma gures and stock transactions of
corporate ocers. It requires internal controls for assuring the accuracy
of nancial reports and disclosures, and
mandates both audits and reports on
those controls. It also requires timely reporting of material changes in nancial
condition and specic enhanced reviews
by the SEC or its agents of corporate reports.

MAJOR ELEMENTS

5. Analyst Conicts of Interest


Title V consists of only one section,
which includes measures designed to
help restore investor condence in the reporting of securities analysts. It denes
the codes of conduct for securities analysts and requires disclosure of knowable
conicts of interest.
6. Commission Resources and Authority
Title VI consists of four sections and denes practices to restore investor condence in securities analysts. It also denes the SECs authority to censure or
bar securities professionals from practice and denes conditions under which
a person can be barred from practicing
as a broker, advisor, or dealer.
7. Studies and Reports
Title VII consists of ve sections and
requires the Comptroller General and
the SEC to perform various studies and
report their ndings. Studies and reports include the eects of consolidation
of public accounting rms, the role of
credit rating agencies in the operation of
securities markets, securities violations,
and enforcement actions, and whether
investment banks assisted Enron, Global
Crossing, and others to manipulate earnings and obfuscate true nancial conditions.
8. Corporate and Criminal Fraud Accountability
Title VIII consists of seven sections and
is also referred to as the Corporate
and Criminal Fraud Accountability Act
of 2002". It describes specic criminal
penalties for manipulation, destruction
or alteration of nancial records or other
interference with investigations, while
providing certain protections for whistleblowers.
9. White Collar Crime Penalty Enhancement
Title IX consists of six sections. This
section is also called the White Collar Crime Penalty Enhancement Act of
2002. This section increases the criminal penalties associated with whitecollar crimes and conspiracies. It recommends stronger sentencing guidelines
and specically adds failure to certify
corporate nancial reports as a criminal
oense.

3
10. Corporate Tax Returns
Title X consists of one section. Section
1001 states that the Chief Executive Ofcer should sign the company tax return.
11. Corporate Fraud Accountability
Title XI consists of seven sections. Section 1101 recommends a name for this
title as Corporate Fraud Accountability Act of 2002. It identies corporate
fraud and records tampering as criminal
oenses and joins those oenses to specic penalties. It also revises sentencing
guidelines and strengthens their penalties. This enables the SEC to resort to
temporarily freezing transactions or payments that have been deemed large or
unusual.

History and context: events


contributing to the adoption of
SarbanesOxley

A variety of complex factors created the conditions and


culture in which a series of large corporate frauds occurred between 20002002. The spectacular, highly publicized frauds at Enron, WorldCom, and Tyco exposed
signicant problems with conicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002.[6] In a 2004 interview, Senator Paul
Sarbanes stated:
The Senate Banking Committee undertook a series of hearings on the problems in the
markets that had led to a loss of hundreds and
hundreds of billions, indeed trillions of dollars in market value. The hearings set out to
lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify...The hearings produced remarkable consensus on the nature of
the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts
conict of interests, inadequate disclosure provisions, and grossly inadequate funding of the
Securities and Exchange Commission.[7]
Auditor conicts of interest: Prior to SOX, auditing rms, the primary nancial watchdogs for investors, were self-regulated. They also performed
signicant non-audit or consulting work for the

companies they audited. Many of these consulting


agreements were far more lucrative than the auditing
engagement. This presented at least the appearance
of a conict of interest. For example, challenging
the companys accounting approach might damage
a client relationship, conceivably placing a signicant consulting arrangement at risk, damaging the
auditing rms bottom line.
Boardroom failures: Boards of Directors, specically Audit Committees, are charged with establishing oversight mechanisms for nancial reporting in
U.S. corporations on the behalf of investors. These
scandals identied Board members who either did
not exercise their responsibilities or did not have the
expertise to understand the complexities of the businesses. In many cases, Audit Committee members
were not truly independent of management.
Securities analysts conicts of interest: The
roles of securities analysts, who make buy and sell
recommendations on company stocks and bonds,
and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conicts. Similar to the auditor conict, issuing a buy or sell recommendation on
a stock while providing lucrative investment banking services creates at least the appearance of a conict of interest.
Inadequate funding of the SEC: The SEC budget
has steadily increased to nearly double the pre-SOX
level.[8] In the interview cited above, Sarbanes indicated that enforcement and rule-making are more
eective post-SOX.
Banking practices: Lending to a rm sends signals
to investors regarding the rms risk. In the case of
Enron, several major banks provided large loans to
the company without understanding, or while ignoring, the risks of the company. Investors of these
banks and their clients were hurt by such bad loans,
resulting in large settlement payments by the banks.
Others interpreted the willingness of banks to lend
money to the company as an indication of its health
and integrity, and were led to invest in Enron as a
result. These investors were hurt as well.
Internet bubble: Investors had been stung in 2000
by the sharp declines in technology stocks and to
a lesser extent, by declines in the overall market.
Certain mutual fund managers were alleged to have
advocated the purchasing of particular technology
stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.
Executive compensation: Stock option and bonus
practices, combined with volatility in stock prices

3 ANALYZING THE COST-BENEFITS OF SARBANESOXLEY


for even small earnings misses, resulted in pressures to manage earnings.[9] Stock options were not
treated as compensation expense by companies, encouraging this form of compensation. With a large
stock-based bonus at risk, managers were pressured
to meet their targets.

2.1

Timeline and passage of Sarbanes


Oxley

of victory: 423 to 3 in the House and 99 to 0 in the Senate. On July 30, 2002, President George W. Bush signed
it into law, stating it included the most far-reaching reforms of American business practices since the time of
Franklin D. Roosevelt. [2]

3 Analyzing the cost-benets of


SarbanesOxley
A signicant body of academic research and opinion exists regarding the costs and benets of SOX, with signicant dierences in conclusions. This is due in part
to the diculty of isolating the impact of SOX from
other variables aecting the stock market and corporate
earnings.[10][11] Section 404 of the act, which requires
management and the external auditor to report on the adequacy of a companys internal control on nancial reporting, is often singled out for analysis. Conclusions from
several of these studies and related criticism are summarized below:

3.1 Compliance costs


Before the signing ceremony of the SarbanesOxley Act, President George W. Bush met with Senator Paul Sarbanes, Secretary
of Labor Elaine Chao and other dignitaries in the Blue Room at
the White House on July 30, 2002

The House passed Rep. Oxleys bill (H.R. 3763) on April


24, 2002, by a vote of 334 to 90. The House then referred the Corporate and Auditing Accountability, Responsibility, and Transparency Act or CAARTA to the
Senate Banking Committee with the support of President
George W. Bush and the SEC. At the time, however, the
Chairman of that Committee, Senator Paul Sarbanes (DMD), was preparing his own proposal, Senate Bill 2673.
Senator Sarbaness bill passed the Senate Banking Committee on June 18, 2002, by a vote of 17 to 4. On June
25, 2002, WorldCom revealed it had overstated its earnings by more than $3.8 billion during the past ve quarters
(15 months), primarily by improperly accounting for its
operating costs. Senator Sarbanes introduced Senate Bill
2673 to the full Senate that same day, and it passed 970
less than three weeks later on July 15, 2002.
The House and the Senate formed a Conference Committee to reconcile the dierences between Sen. Sarbaness bill (S. 2673) and Rep. Oxleys bill (H.R. 3763).
The conference committee relied heavily on S. 2673
and most changes made by the conference committee
strengthened the prescriptions of S. 2673 or added new
prescriptions. (John T. Bostelman, The SarbanesOxley
Deskbook 231.)
The Committee approved the nal conference bill on July
24, 2002, and gave it the name the SarbanesOxley Act
of 2002. The next day, both houses of Congress voted
on it without change, producing an overwhelming margin

FEI Survey (Annual): Finance Executives International (FEI) provides an annual survey on SOX Section 404 costs. These costs have continued to decline relative to revenues since 2004. The 2007
study indicated that, for 168 companies with average revenues of $4.7 billion, the average compliance
costs were $1.7 million (0.036% of revenue).[12]
The 2006 study indicated that, for 200 companies
with average revenues of $6.8 billion, the average
compliance costs were $2.9 million (0.043% of revenue), down 23% from 2005. Cost for decentralized companies (i.e., those with multiple segments
or divisions) were considerably more than centralized companies. Survey scores related to the positive eect of SOX on investor condence, reliability
of nancial statements, and fraud prevention continue to rise. However, when asked in 2006 whether
the benets of compliance with Section 404 have
exceeded costs in 2006, only 22 percent agreed.[13]
Foley & Lardner Survey (2007): This annual study
focused on changes in the total costs of being a U.S.
public company, which were signicantly aected
by SOX. Such costs include external auditor fees,
directors and ocers (D&O) insurance, board compensation, lost productivity, and legal costs. Each
of these cost categories increased signicantly between FY2001 and FY2006. Nearly 70% of survey
respondents indicated public companies with revenues under $251 million should be exempt from
SOX Section 404.[14]
Butler/Ribstein (2006): Their book proposed a
comprehensive overhaul or repeal of SOX and a

3.3

Eects on exchange listing choice of non-US companies

variety of other reforms. For example, they indicate that investors could diversify their stock investments, eciently managing the risk of a few
catastrophic corporate failures, whether due to fraud
or competition. However, if each company is required to spend a signicant amount of money and
resources on SOX compliance, this cost is borne
across all publicly traded companies and therefore
cannot be diversied away by the investor.[15]

3.3 Eects on exchange listing choice of


non-US companies

Arping/Sautner (2010): This research paper


analyzes whether SOX enhanced corporate
transparency.[17] Looking at foreign rms that are
cross-listed in the US, the paper indicates that,
relative to a control sample of comparable rms
that are not subject to SOX, cross-listed rms
became signicantly more transparent following
SOX. Corporate transparency is measured based
on the dispersion and accuracy of analyst earnings
forecasts.

The SarbanesOxley Acts eect on non-U.S. companies cross-listed in the U.S. is dierent on rms from
developed and well regulated countries than on rms from
less developed countries according to Kate Litvak.[24]
Companies from badly regulated countries see benets
that are higher than the costs from better credit ratings
by complying to regulations in a highly regulated country
(USA), but companies from developed countries only incur the costs, since transparency is adequate in their home
countries as well. On the other hand, the benet of better
credit rating also comes with listing on other stock exchanges such as the London Stock Exchange.

Some have asserted that SarbanesOxley legislation has


helped displace business from New York to London,
where the Financial Services Authority regulates the nancial sector with a lighter touch. In the UK, the
non-statutory Combined Code of Corporate Governance
plays a somewhat similar role to SOX. See Howell E.
Jackson & Mark J. Roe, Public Enforcement of Secu A 2011 SEC study found that Section 404(b) com- rities Laws: Preliminary Evidence (Working Paper Janpliance costs have continued to decline, especially uary 16, 2007). London based Alternative Investment
after 2007 accounting guidance.[16]
Market claims that its spectacular growth in listings almost entirely coincided with the Sarbanes Oxley legislation. In December 2006 Michael Bloomberg, New Yorks
mayor, and Charles Schumer, a U.S. senator from New
3.2 Benets to rms and investors
York, expressed their concern.[23]

Iliev (2007): This research paper indicated that


SOX 404 indeed led to conservative reported earnings but also reduced rightly or wrongly stock
valuations of small rms.[18] Lower earnings often
cause the share price to decrease.
Skaife/Collins/Kinney/LaFond (2006): This research paper indicates that borrowing costs are
much lower for companies that improved their internal control, by between 50 and 150 basis points
(.5 to 1.5 percentage points).[19]
Lord & Benoit Report (2006): Do the Benets of
404 Exceed the Cost? A study of a population of
nearly 2,500 companies indicated that those with
no material weaknesses in their internal controls, or
companies that corrected them in a timely manner,
experienced much greater increases in share prices
than companies that did not.[20][21] The report indicated that the benets to a compliant company in
share price (10% above Russell 3000 index) were
greater than their SOX Section 404 costs.

Piotroski and Srinivasan (2008) examine a comprehensive sample of international companies that list onto U.S.
and U.K. stock exchanges before and after the enactment of the Act in 2002. Using a sample of all listing
events onto U.S. and U.K. exchanges from 19952006,
they nd that the listing preferences of large foreign rms
choosing between U.S. exchanges and the LSEs Main
Market did not change following SOX. In contrast, they
nd that the likelihood of a U.S. listing among small foreign rms choosing between the Nasdaq and LSEs Alternative Investment Market decreased following SOX.
The negative eect among small rms is consistent with
these companies being less able to absorb the incremental costs associated with SOX compliance. The screening
of smaller rms with weaker governance attributes from
U.S. exchanges is consistent with the heightened governance costs imposed by the Act increasing the bondingrelated benets of a U.S. listing.[25]

4 Implementation of key provisions

4.1 SarbanesOxley Section 302: Disclosure controls


Institute of Internal Auditors (2005): The research
paper indicates that corporations have improved
their internal controls and that nancial statements Under SarbanesOxley, two separate sections came into
are perceived to be more reliable.[22]
eectone civil and the other criminal. 15 U.S.C.

4 IMPLEMENTATION OF KEY PROVISIONS

7241 (Section 302) (civil provision); 18 U.S.C. 1350


(Section 906) (criminal provision).

1. propose the rules or regulations required by this section, not later than 90 days after the date of enactment of
Section 302 of the Act mandates a set of internal pro- this Act; and 2. issue nal rules or regulations required
cedures designed to ensure accurate nancial disclosure. by this section, not later than 270 days after that date of
The signing ocers must certify that they are respon- enactment.
sible for establishing and maintaining internal controls"
and have designed such internal controls to ensure that
4.3 SarbanesOxley Section 401: Disclomaterial information relating to the company and its
sures in periodic reports (O-balance
consolidated subsidiaries is made known to such ocers
sheet items)
by others within those entities, particularly during the period in which the periodic reports are being prepared. 15
U.S.C. 7241(a)(4). The ocers must have evaluated The bankruptcy of Enron drew attention to o-balance
the eectiveness of the company's internal controls as of sheet instruments that were used fraudulently. During
a date within 90 days prior to the report and have pre- 2010, the court examiners review of the Lehman Brothsented in the report their conclusions about the eective- ers bankruptcy also brought these instruments back into
ness of their internal controls based on their evaluation as focus, as Lehman had used an instrument called Repo
105 to allegedly move assets and debt o-balance sheet
of that date. Id..
to make its nancial position look more favorable to inThe SEC interpreted the intention of Sec. 302 in Fi- vestors. Sarbanes-Oxley required the disclosure of all
nal Rule 338124. In it, the SEC denes the new term material o-balance sheet items. It also required an SEC
"disclosure controls and procedures, which are distinct study and report to better understand the extent of usage
from "internal controls over nancial reporting.[26] Un- of such instruments and whether accounting principles
der both Section 302 and Section 404, Congress di- adequately addressed these instruments; the SEC report
rected the SEC to promulgate regulations enforcing these was issued June 15, 2005.[28][29] Interim guidance was isprovisions.[27]
sued in May 2006, which was later nalized.[30] Critics
External auditors are required to issue an opinion on argued the SEC did not take adequate steps to regulate
whether eective internal control over nancial reporting and monitor this activity.[31]
was maintained in all material respects by management.
This is in addition to the nancial statement opinion regarding the accuracy of the nancial statements. The 4.4 SarbanesOxley Section 404: Assessrequirement to issue a third opinion regarding management of internal control
ments assessment was removed in 2007.
Further information: SOX 404 top-down risk assessment

4.2

SarbanesOxley Section 303: Im- The most contentious aspect of SOX is Section 404,
proper Inuence on Conduct of Audits which requires management and the external auditor to

report on the adequacy of the companys internal control on nancial reporting (ICFR). This is the most costly
a. Rules To Prohibit. It shall be unlawful, in contraven- aspect of the legislation for companies to implement, as
tion of such rules or regulations as the Commission shall documenting and testing important nancial manual and
prescribe as necessary and appropriate in the public in- automated controls requires enormous eort.[32]
terest or for the protection of investors, for any ocer
or director of an issuer, or any other person acting under Under Section 404 of the Act, management is required
the direction thereof, to take any action to fraudulently in- to produce an internal control report as part of each
uence, coerce, manipulate, or mislead any independent annual Exchange Act report. See 15 U.S.C. 7262. The
public or certied accountant engaged in the performance report must arm the responsibility of management for
of an audit of the nancial statements of that issuer for the establishing and maintaining an adequate internal conpurpose of rendering such nancial statements materially trol structure and procedures for nancial reporting. 15
U.S.C. 7262(a). The report must also contain an asmisleading.
sessment, as of the end of the most recent scal year of
b. Enforcement. In any civil proceeding, the Commission the Company, of the eectiveness of the internal conshall have exclusive authority to enforce this section and trol structure and procedures of the issuer for nancial
any rule or regulation issued under this section.
reporting. To do this, managers are generally adopting
c. No Preemption of Other Law. The provisions of sub- an internal control framework such as that described in
section (a) shall be in addition to, and shall not supersede COSO.
or preempt, any other provision of law or any rule or reg- To help alleviate the high costs of compliance, guidance
ulation issued thereunder.
and practice have continued to evolve. The Public Comd. Deadline for Rulemaking. The Commission shall --

pany Accounting Oversight Board (PCAOB) approved

4.6

SarbanesOxley Section 802: Criminal penalties for inuencing US Agency investigation/proper administration7

Auditing Standard No. 5 for public accounting rms


on July 25, 2007.[33] This standard superseded Auditing Standard No. 2, the initial guidance provided in
2004. The SEC also released its interpretive guidance
[34]
on June 27, 2007. It is generally consistent with the
PCAOBs guidance, but intended to provide guidance for
management. Both management and the external auditor are responsible for performing their assessment in the
context of a top-down risk assessment, which requires
management to base both the scope of its assessment and
evidence gathered on risk. This gives management wider
discretion in its assessment approach. These two standards together require management to:
Assess both the design and operating eectiveness
of selected internal controls related to signicant accounts and relevant assertions, in the context of material misstatement risks;
Understand the ow of transactions, including IT aspects, in sucient detail to identify points at which
a misstatement could arise;
Evaluate company-level (entity-level) controls,
which correspond to the components of the COSO
framework;
Perform a fraud risk assessment;
Evaluate controls designed to prevent or detect
fraud, including management override of controls;
Evaluate controls over the period-end nancial reporting process;
Scale the assessment based on the size and complexity of the company;

xed cost involved in completing the assessment. For


example, during 2004 U.S. companies with revenues exceeding $5 billion spent 0.06% of revenue on SOX compliance, while companies with less than $100 million in
revenue spent 2.55%.[36]
This disparity is a focal point of 2007 SEC and U.S. Senate action.[37] The PCAOB intends to issue further guidance to help companies scale their assessment based on
company size and complexity during 2007. The SEC issued their guidance to management in June, 2007.[34]
After the SEC and PCAOB issued their guidance, the
SEC required smaller public companies (non-accelerated
lers) with scal years ending after December 15, 2007
to document a Management Assessment of their Internal Controls over Financial Reporting (ICFR). Outside
auditors of non-accelerated lers however opine or test
internal controls under PCAOB (Public Company Accounting Oversight Board) Auditing Standards for years
ending after December 15, 2008. Another extension was
granted by the SEC for the outside auditor assessment
until years ending after December 15, 2009. The reason
for the timing disparity was to address the House Committee on Small Business concern that the cost of complying with Section 404 of the SarbanesOxley Act of
2002 was still unknown and could therefore be disproportionately high for smaller publicly held companies.[38]
On October 2, 2009, the SEC granted another extension
for the outside auditor assessment until scal years ending after June 15, 2010. The SEC stated in their release
that the extension was granted so that the SECs Oce
of Economic Analysis could complete a study of whether
additional guidance provided to company managers and
auditors in 2007 was eective in reducing the costs of
compliance. They also stated that there will be no further
extensions in the future.[39]

Rely on managements work based on factors such


as competency, objectivity, and risk;
On September 15, 2010 the SEC issued nal rule 33 Conclude on the adequacy of internal control over 9142 the permanently exempts registrants that are neither
accelerated nor large accelerated lers as dened by Rule
nancial reporting.
12b-2 of the Securities and Exchange Act of 1934 from
[40]
SOX 404 compliance costs represent a tax on ine- Section 404(b) internal control audit requirement.
ciency, encouraging companies to centralize and automate their nancial reporting systems. This is apparent in the comparative costs of companies with decen- 4.6 SarbanesOxley Section 802: Criminal penalties for inuencing US Agency
tralized operations and systems, versus those with centralized, more ecient systems. For example, the 2007
investigation/proper administration
Financial Executives International (FEI) survey indicated
average compliance costs for decentralized companies Section 802(a) of the SOX, 18 U.S.C. 1519 states:
were $1.9 million, while centralized company costs were
$1.3 million.[35] Costs of evaluating manual control procedures are dramatically reduced through automation.
4.7 SarbanesOxley Section 906: Crimi-

4.5

SarbanesOxley 404 and smaller public companies

nal Penalties for CEO/CFO nancial


statement certication

1350. Section 906 states: Failure of corporate ocers


The cost of complying with SOX 404 impacts smaller to certify nancial reports
companies disproportionately, as there is a signicant (a) Certication of Periodic Financial Reports. Each

6 CRITICISM

periodic report containing nancial statements led by


an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78m (a) or 78o (d)) shall be accompanied bySection 802(a) of the SOX a written statement by the chief executive ocer and chief nancial ofcer (or equivalent thereof) of the issuer.
(b) Content. The statement required under subsection
(a) shall certify that the periodic report containing the nancial statements fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act
of [1] 1934 (15 U.S.C. 78m or 78o (d)) and that information contained in the periodic report fairly presents, in
all material respects, the nancial condition and results of
operations of the issuer.
(c) Criminal Penalties. Whoever (1) certies any
statement as set forth in subsections (a) and (b) of this
section knowing that the periodic report accompanying
the statement does not comport with all the requirements
set forth in this section shall be ned not more than
$1,000,000 or imprisoned not more than 10 years, or
both; or

6 Criticism
Congressman Ron Paul and others such as former
Arkansas governor Mike Huckabee have contended that
SOX was an unnecessary and costly government intrusion
into corporate management that places U.S. corporations
at a competitive disadvantage with foreign rms, driving
businesses out of the United States. In an April 14, 2005
speech before the U.S. House of Representatives, Paul
stated, These regulations are damaging American capital
markets by providing an incentive for small US rms and
foreign rms to deregister from US stock exchanges. According to a study by a researcher at the Wharton Business
School, the number of American companies deregistering from public stock exchanges nearly tripled during the
year after SarbanesOxley became law, while the New
York Stock Exchange had only 10 new foreign listings
in all of 2004. The reluctance of small businesses and
foreign rms to register on American stock exchanges is
easily understood when one considers the costs Sarbanes
Oxley imposes on businesses. According to a survey by
Korn/Ferry International, SarbanesOxley cost Fortune
500 companies an average of $5.1 million in compliance
expenses in 2004, while a study by the law rm of Foley and Lardner found the Act increased costs associated
with being a publicly held company by 130 percent. [43]

(2) willfully certies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall
be ned not more than $5,000,000, or imprisoned not A research study published by Joseph Piotroski of Stanford University and Suraj Srinivasan of Harvard Business
more than 20 years, or both.
School titled Regulation and Bonding: Sarbanes Oxley
Act and the Flow of International Listings in the Journal
4.8 SarbanesOxley Section 1107: Crim- of Accounting Research in 2008 found that following the
inal penalties for retaliation against acts passage, smaller international companies were more
likely to list in stock exchanges in the U.K. rather than
whistleblowers
U.S. stock exchanges.[44]
Section 1107 of the SOX 18 U.S.C. 1513(e) states:[41]

Clawbacks of executive compensation for misconduct

One of the highlights of the law was a provision that allowed the SEC to force a companys CEO or CFO to
disgorge any executive compensation (such as bonus pay
or proceeds from stock sales) earned within a year of
misconduct that results in an earnings restatement. However, according to Gretchen Morgenson of The New York
Times, such clawbacks have actually been rare, due in
part to the requirement that the misconduct must be either deliberate or reckless. The SEC did not attempt to
claw back any executive compensation until 2007, and
as of December 2013 had only brought 31 cases, 13 of
which were begun after 2010. However, according to
Dan Whalen of the accounting research rm Audit Analytics, the threat of clawbacks, and the time-consuming
litigation associated with them, has forced companies to
tighten their nancial reporting standards.[42]

During the nancial crisis of 20072010, critics blamed


SarbanesOxley for the low number of Initial Public
Oerings (IPOs) on American stock exchanges during
2008. In November 2008, Newt Gingrich and co-author
David W. Kralik called on Congress to repeal Sarbanes
Oxley.[45]
According to the National Venture Capital Association,
in all of 2008 there have been just six companies that have
gone public. Compare that with 269 IPOs in 1999, 272
in 1996, and 365 in 1986. (According to Hoovers IPO
Scorecard, however, 31, not six companies went public
on the major U.S. stock exchanges in 2008, a year when
the economy was much worse than 2007 (when 209 companies went public) or 2006 (205 IPOs).[46] )
However, the number of IPOs had declined to 87 in 2001,
well down from the highs, but before SarbanesOxley was
passed.[47] In 2004, IPOs were up 195% from the previous year to 233.[48] There were 196 IPOs in 2005, 205 in
2006 (with a sevenfold increase in deals over $1 billion)
and 209 in 2007.[49][50]
A 2012 Wall St. Journal editorial stated, One reason
the U.S. economy isn't creating enough jobs is that its

9
not creating enough employers... For the third year in a
row the worlds leading exchange for new stock oerings
was located not in New York, but in Hong Kong... Given
that the U.S. is still home to the worlds largest economy,
theres no reason it shouldn't have the most vibrant equity marketsunless regulation is holding back the creation of new public companies. On that score its getting harder for backers of the Sarbanes-Oxley accounting law to explain away each disappointing year since its
2002 enactment as some kind of temporary or unrelated
setback.[51]

Praise

rectly credited to Sarbanes-Oxley. The fraud, which


spanned nearly 20 years and involved over $24 million, was committed by Value Line (NASDAQ: VALU)
against its mutual fund shareholders. The fraud was rst
reported to the SEC in 2004 by the then Value Line Fund
(NASDAQ: VLIFX) portfolio manager and Chief Quantitative Strategist, Mr. John (Jack) R. Dempsey of Easton, Connecticut, who was required to sign a Code of
Business Ethics as part of SOX.[58][59][60] Restitution totaling $34 million was placed in a fair fund and returned
to the aected Value Line mutual fund investors.[61]
The Commission ordered Value Line to pay a total of
$43,705,765 in disgorgement, prejudgment interest and
civil penalty, and ordered Buttner, CEO and Henigson,
COO to pay civil penalties of $1,000,000 and $250,000,
respectively. The Commission further imposed ocer
and director bars and broker-dealer, investment adviser,
and investment company associational bars (Associational Bars) against Buttner and Henigson. No criminal
charges were led.

Former Federal Reserve Chairman Alan Greenspan


praised the SarbanesOxley Act in 2005: I am surprised
that the SarbanesOxley Act, so rapidly developed and
enacted, has functioned as well as it has...the act importantly reinforced the principle that shareholders own
Sarbanes Oxley Act has been praised for nurturing an ethour corporations and that corporate managers should be
ical culture as it forces top management to be transparent
working on behalf of shareholders to allocate business reand employees to be responsible for their acts whilst pro[52]
sources to their optimum use.
tecting whistleblowers.[62]
SOX has been praised by a cross-section of nancial industry experts, citing improved investor condence and
more accurate, reliable nancial statements. The CEO
8 Legal challenges
and CFO are now required to unequivocally take ownership for their nancial statements under Section 302,
which was not the case prior to SOX. Further, auditor A lawsuit (Free Enterprise Fund v. Public Company Acconicts of interest have been addressed, by prohibiting counting Oversight Board) was led in 2006 challenging
auditors from also having lucrative consulting agreements the constitutionality of the PCAOB. The complaint arwith the rms they audit under Section 201. SEC Chair- gues that because the PCAOB has regulatory powers over
man Christopher Cox stated in 2007: SarbanesOxley the accounting industry, its ocers should be appointed
[63]
Further, behelped restore trust in U.S. markets by increasing ac- by the President, rather than the SEC.
countability, speeding up reporting, and making audits cause the law lacks a severability clause, if part of the
law is judged unconstitutional, so is the remainder. If
more independent.[53]
the plainti prevails, the U.S. Congress may have to deThe Financial Executives International (FEI) 2007 study vise a dierent method of ocer appointment. Further,
and research by the Institute of Internal Auditors (IIA)
the other parts of the law may be open to revision.[64][65]
also indicate SOX has improved investor condence in The lawsuit was dismissed from a District Court; the denancial reporting, a primary objective of the legislacision was upheld by the Court of Appeals on August
tion. The IIA study also indicated improvements in 22, 2008.[66] Judge Kavanaugh, in his dissent, argued
board, audit committee, and senior management engagestrongly against the constitutionality of the law.[67] On
ment in nancial reporting and improvements in nancial May 18, 2009, the United States Supreme Court agreed
controls.[54][55]
to hear this case.[68] On December 7, 2009, it heard the
Financial restatements increased signicantly in the wake oral arguments.[69] On June 28, 2010, the United States
of the SOX legislation, as companies cleaned up their Supreme Court unanimously turned away a broad chalbooks. Glass, Lewis & Co. LLC is a San Francisco-based lenge to the law, but ruled 54 that a section related to aprm that tracks the volume of do-overs by public compa- pointments violates the Constitutions separation of pownies. Its March 2006 report, Getting It Wrong the First ers mandate. The act remains fully operative as a law
Time, shows 1,295 restatements of nancial earnings in pending a process correction.[70]
2005 for companies listed on U.S. securities markets, al- In its March 4, 2014 Lawson v. FMR LLC decision the
most twice the number for 2004. Thats about one re- United States Supreme Court rejected a narrow reading
statement for every 12 public companiesup from one of the SOX whistleblower protection and instead held that
for every 23 in 2004, says the report.[56]
the anti-retaliation protection that the Sarbanes-Oxley
One fraud uncovered by the Securities and Exchange Act of 2002 provides to whistleblowers applies also to
Commission (SEC) in November 2009 [57] may be di- employees of a public companys private contractors and

10

12

subcontractors.[71]

Legislative information

REFERENCES

Richard M. Scrushy, CEO of HealthSouth, the


rst executive charged and to be acquitted under
SarbanesOxley
Fair Funds, established by SarbanesOxley

House: H.R. 3763, H. Rept. 107414, H. Rept.


107610

Basel Accord

Senate: S. 2673, S. Rept. 107205

Contract Management

Law: Pub.L. 107204, 116 Stat. 745

Agency cost

Reg FD

Data Loss Prevention

10

Similar laws in other countries

C-SOX - Canadian equivalent of SarbanesOxley


Act
German Corporate Governance Code - 2002
German corporate governance code (German
Wikipedia)
King Report on Corporate Governance- 2002 South
African corporate governance code, King II Report,
non-legislative
Code Tabaksblat - 2003 Dutch governance code,
based on 'comply or explain' (Dutch Wikipedia)
Financial Security Law of France (Loi sur la
Scurit Financire) - 2003 French equivalent of
SarbanesOxley Act
Corporate Law Economic Reform Program Act
2004- 2004 Australian corporate reporting and disclosure law
Clause 49 - 2005 Indian corporate governance
clause
L262/2005 (Disposizioni per la tutela del risparmio
e la disciplina dei mercati nanziari, 2005) 2005
Italian equivalent of SarbanesOxley Act

Data governance

12 References
[1] Kimmel, PhD, CPA, Paul D.; Weygandt, PhD, CPA, Jerry
J.; Kieso, PhD, CPA, Donald E. (2011). Financial Accounting, 6th Edition. Wiley. ISBN 978-0-470-53477-9.
[2] Bumiller, Elisabeth (2002-07-31). Bush Signs Bill
Aimed at Fraud in Corporations. The New York Times.
[3] Mckinsey & Company (2007). NY REPORT. Schumer
Senate website.
[4] Not Everyone Hates SarbOx.
BusinessWeek.com.
Bloomberg L.P. 28 January 2007. Retrieved 13 March
2014.
[5] Kuschnik, Bernhard; The Sarbanes Oxley Act: Big
Brother is watching you or Adequate Measures of Corporate Governance Regulation? 5 Rutgers Business Law
Journal [2008], 6495; available at http://businesslaw.
newark.rutgers.edu/RBLJ_vol5_no1_kuschnik.pdf
[6] Farrell, Greg. America Robbed Blind. Wizard Academy
Press: 2005
[7] Lucas, Nance (2004). Sarbanes Interview. Findarticles.com. Retrieved 2010-08-27.
[8] SEC Annual Budget. Sec.gov. 2009-06-23. Retrieved
2010-08-27.

J-SOX - 2006 Japanese equivalent of Sarbanes


Oxley Act

[9] SEC Levitt Speech The Numbers Game. Retrieved


2010-08-27.

TC-SOX 11 Turkish equivalent of SarbanesOxley


Act

[10] Five years of SarbanesOxley. The Economist. 200707-26.

11

See also

GlassSteagall Act
Information technology audit
Information technology controls
ISO/IEC 27000-series

[11] Shakespeare, Catharine (2008). SarbanesOxley Act of


2002 Five Years On: What Have We Learned?". Journal
of Business & Technology Law: 333.
[12] FEI 2007 Survey of SOX 404 Costs.
Fei.mediaroom.com. 2008-04-30. Retrieved 201008-27.
[13] FEI 2006 Survey of SOX 404 Costs
[14] Foley & Lardner 2007 Study. Foley.com. 2007-02-08.
Retrieved 2010-08-27.

11

[15] Butler, Henry N. (2006-06-05). "''The SarbanesOxley


Debacle''". Aei.org. Retrieved 2010-08-27.

[35] FEI Survey 2007. Fei.mediaroom.com. 2008-04-30.


Retrieved 2010-08-27.

[16] Study and Recommendations on Section 404(b)". Securities and Exchange Commission, April 2011

[36] Final Report: Advisory Committee on Smaller Public


Companies (PDF). Retrieved 2010-08-27.

[17] The Eect of Corporate Governance Regulation on


Transparency: Evidence from the Sarbanes-Oxley Act of
2002. Papers.ssrn.com. Retrieved 2010-08-27.

[37] Dodd-Shelby Amendment. Dodd.senate.gov. 2007-0425. Retrieved 2010-08-27.

[18] The Eect of the SarbanesOxley Act (Section 404)


Managements Report on Audit Fees, Accruals and Stock
Returns. Papers.ssrn.com. Retrieved 2010-08-27.
[19] The Eect of Internal Control Deciencies on Firm Risk
and Cost of Capital
[20] Lord & Benoit Report (PDF). Retrieved 2010-08-27.
[21] Benoit WSJ (PDF). Retrieved 2010-08-27.
[22] IIA Research SOX Looking at the Benets. Theiia.org.
Retrieved 2010-08-27.
[23] Bloomberg-Schumer report
[24] SSRN-The Eect of the SarbanesOxley Act on NonU.S. Companies Cross-Listed in the U.S. by Kate Litvak.
Papers.ssrn.com. Retrieved 2010-08-27.
[25] Piotroski, Joseph D. and Srinivasan, Suraj, Regulation
and Bonding: The SarbanesOxley Act and the Flow of
International Listings(January 2008). Available at SSRN:
http://ssrn.com/abstract=956987
[26] Final Rule: Certication of Disclosure in Companies
Quarterly and Annual Reports. Sec.gov. Retrieved
2010-08-27.
[27] SEC Final Rules 338238. Sec.gov. Retrieved 201008-27.
[28] SEC-Press Release on 401(c) Report-June 15, 2005.
Sec.gov. 2005-06-15. Retrieved 2010-08-27.
[29] Report and Recommendations Pursuant to Section
401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with O-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers
(PDF). Retrieved 2010-08-27.

[38] SarbanesOxley: Progressive Punishment for Regressive Victimization, 44 Hous. L. Rev. 95 (2007)". Papers.ssrn.com. Retrieved 2010-08-27.
[39] SEC Press Release:Final Stage of Section 404 of
SarbanesOxley to Begin in June. Sec.gov. Retrieved
2010-08-27.
[40] Internal control over nancial reporting in exchange act
periodic reports of non-accelerated lers. SEC.gov. Retrieved 2010-09-15.
[41] Stephen M. Kohn, Michael D. Kohn, and David K. Colapinto (2004). Whistleblower Law: A Guide to Legal
Protections for Corporate Employees. Praeger Publishers. ISBN 0-275-98127-4
[42] Morgenson, Gretchen (2013-12-29).
Clawbacks?
They're Still a Rare Breed. The New York Times.
[43] Repeal Sarbanes-Oxley! Ron Paul, April 14, 2005
[44] Regulation and Bonding: The Sarbanes-Oxley Act and
the Flow of International Listings. Journal of Accounting Research. May 2008. doi:10.1111/j.1475679X.2008.00279.x.
[45] Newt Gingrich,David W. Kralik (2008-11-05).
Gingrich. Sfgate.com. Retrieved 2010-08-27.
[46] Hoovers IPO Scorecard Reveals Only Slight Growth in
2007. Hoovers.com. 2008-01-04. Retrieved 2012-0613.
[47] Hoovers IPO Analysis For 2001 Shows Resurgence Of
Not-Coms | Hoovers: The most comprehensive business info available. Hoovers.com. 2002-01-03. Retrieved 2010-08-27.
[48] Number of IPOs in 2004 Increased by 195%

[30] Policy Statement: Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities (PDF). Retrieved 2010-08-27.

[49] Hoovers IPO Scorecard Reveals Increase In Momentum


In 2006, Along With Seven-Fold Increase In Number of
$1 Billion-Plus Deals. Hoovers.com. 2007-01-03. Retrieved 2010-08-27.

[31] Koniak, Susan P.; Cohen, George M.; Dana, David A. &
Ross, Thomas (April 3, 2010), How Washington Abetted
the Bank Job, New York Times

[50] Hoovers IPO Scorecard Reveals Only Slight Growth in


2007. Hoovers.com. 2008-01-04. Retrieved 2010-0827.

[32] See New Center for Data Analysis Report

[51] America as Number Two, Wall St. Journal, January 4,


2012

[33] PCAOB Auditing Standard No. 5


[34] SEC Interpretive Release: Commission Guidance Regarding Managements Report on Internal Control Over
Financial Reporting Under Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (PDF). Retrieved
2010-08-27.

[52] Greenspan praises SOX. Federalreserve.gov. 2005-0515. Retrieved 2010-08-27.


[53] Farrell, Greg (2007-07-30). USA Today SOX Law
Has Been a Pretty Clean Sweep. Usatoday.com. Retrieved 2010-08-27.

12

13

[54] FEI Survey. Fei.mediaroom.com. 2008-04-30. Retrieved 2010-08-27.


[55] IIA Study. Theiia.org. Retrieved 2010-08-27.
[56] Glass Lewis Survey of Restatements (PDF). Retrieved
2010-08-27.
[57] Administrative Proceeding: Value Line, Inc., Value Line
Securities, Inc., Jean Bernhard Buttner, and David Henigson (PDF). Retrieved 2010-08-27.
[58] Publisher Value Line may take earnings hit from SEC
inquiry. Marketwatch.com. Retrieved 2010-08-27.
[59] Vidya, Sree (2009-11-09). Value Line Settlement Marks
End of Buttner Reign. Bloomberg.com. Retrieved 201008-27.
[60] The S.E.C. Is Investigating Fee Practices at Value Line
[61] Keating, Gina (2009-11-04). Value Line, execs to pay
$45 mln in SEC case. Reuters.com. Retrieved 2010-0827.
[62] Whistleblower Protection Under The Sarbanes-Oxley
Act. Newyork law journal. 2003-06-26. Retrieved
2011-03-04.
[63] Complaint: Free Enterprise Fund, et al. v. The Public
Company Accounting Oversight Board, et al. UNITED
STATES DISTRICT COURT - Case 1:06CV00217.
The Wall Street Journal.
[64] Post Store (2008-07-20). Washington Post. Washington Post. Retrieved 2010-08-27.
[65] NPR-Supreme Court Considers Sarbanes-Oxley Board.
Npr.org. 2009-12-07. Retrieved 2010-08-27.
[66] PCAOB News Release
[67] NY Sun Editorial. Nysun.com. Retrieved 2010-08-27.
[68]
[69] 12_7_09 Oral Argument Transcript. Supremecourtus.gov. Archived from the original on December 21,
2009. Retrieved 2010-08-27.
[70] Norris, Floyd; Liptak, Adam (June 28, 2010). Supreme
Court Upholds Accounting Board. The New York Times.
[71] Rapp, Georey. Opinion analysis: Coverage of SOX
whistleblower protection is no longer Up in the Air (in
March 5, 2014). SCOTUSblog. Retrieved June 24, 2014.

13

External links

Text of the SOX Act


President George W. Bush Signing Statement
Study Pursuant to Section 108(d) of the Sarbanes
Oxley Act of 2002 on the Adoption by the United
States Financial Reporting System of a PrinciplesBased Accounting System

EXTERNAL LINKS

The 10th Anniversary of the Sarbanes-Oxley Act:


Hearing before the Subcommittee on Capital Markets and Government Sponsored Enterprises of the
Committee on Financial Services, U.S. House of
Representatives, One Hundred Twelfth Congress,
Second Session, July 26, 2012, 139 pages

13

14
14.1

Text and image sources, contributors, and licenses


Text

SarbanesOxley Act Source: http://en.wikipedia.org/wiki/SarbanesOxley_Act?oldid=630459210 Contributors: DavidLevinson, Caltrop, Nairobiny, Olivier, Edward, Michael Hardy, Minesweeper, CesarB, Duckie, Jschwa1, Whkoh, Cherkash, Rednblu, Hdk, Tpbradbury, Jaimeglz, Bevo, Indefatigable, Raul654, Jeq, Jni, Bearcat, Mustang dvs, Jakohn, Vespristiano, Postdlf, Rfc1394, Puckly, Inkling,
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