the Myths and Realities of Sarbanes-Oxley
2006 - The June articles “The Chilling Effect of Sarbanes-Oxley:
Myth or Reality?” and “Adding Significant Value
with Internal Controls” contained significantly different
approaches to the Sarbanes-Oxley Act (SOX). Whether the difference
was intentional is not clear, but the differences bear notice
and further amplification.
first article addressed the merits of SOX overly simplistically.
The authors regurgitated the media rhetoric about the costs
of.SOX to companies and its chilling effect on capital market
activities. Too often the article cited data out of context.
For example, the reduction of technology IPOs since the
1990s has more to do with overall capital market functionality
than SOX. But for accountants and CPAs, the real issues
were not addressed at all. The real issue is fraud and the
cost of fraud. As a former partner of a Big Eight, then
Big Four, accounting firm, the litigation costs of fraud
have had a personal effect on my earnings, as I think most
other CPAs at large firms would agree. Nowhere was this
about the billions of dollars that shareholders and employees
who own company stock lose when fraud occurs? Again, the
article did not discuss these burdens on society, which
SOX endeavors to address. This is exactly the approach taken
by much of the media in addressing SOX costs. For example,
as noted above, the article cites the decline of technology
IPOs from 1999. Yet how many of those companies caused losses
to the public that bought their shares? Is it a bad thing
that companies cannot go public without an adequate financial
track record? The article does not endeavor to articulate
whether these are factors in the decline or benefits to
the investing public. Instead the article attributes the
problem, by allusion, to SOX. The article cites delisting
activity as a cost of SOX, yet does not discuss whether
a company unwilling to bear the cost of delivering accurate
financial information to its investors should in fact be
allowed to be public. By implication the article suggests
that, without SOX, companies did fine. Here again the article
simplistically implies that something else assures the accuracy
of financial information. In effect, the authors are suggesting
that it is the CPA’s audit that protects the shareholders
from fraud. Given this implicit message, how this article
became the cover story is beyond me.
similar points could be made about this superficial article.
CPAs ought to stand strongly for accuracy in financial reporting,
even if it costs companies more. Was this not the point
of SOX? If this cover article represents the accounting
industry’s view of the importance of accurate financial
reporting, it remains an industry with some serious issues.
second article, “Adding Significant Value with Internal
Controls,” had a completely different tone. It considered
the merit of accurate internal controls and the values a
company can realize with such controls. Yes, accuracy costs
a bit more, but the article nicely points out the benefits
to the company in risk management and other related areas.
Is this not a better representation of the thinking that
the accounting industry should bring to financial reporting?
authors of “Chilling Effect” respond:
focus of our article, “The Chilling Effect of Sarbanes-Oxley:
Myth or Reality?” was to determine whether SOX had
inhibited small technology-based entrepreneurial companies
from going public. The article was not intended as a comprehensive
review of the merits of SOX with respect to its goals of
promoting “accuracy in financial reporting.”
We certainly agree with the goals and objectives of SOX.
The results of the study refuted one myth that has been
used to attack the application of SOX: specifically, that
it has inhibited small technology companies from going public.
Stephens, PhD, CPA
E. Clair Daniels Professor of Accounting
Robert Schwartz, PhD
EWU Foundation Distinguished Professor of Entrepreneurship
Eastern Washington University
Note: The CPA Journal welcomes submissions
from diverse perspectives. In choosing cover articles, the
editors weigh a number of factors, including the quality
of the article, the breadth of its interest, and the originality
of its conclusions. The views expressed in The CPA
Journal, including the cover article, are those of the
authors and not those of The CPA Journal, unless