Whether it's election-year politics, genuine concern, or the belief that ten years is plenty of time to have followed the law, the Sarbanes-Oxley Act is facing renewed opposition.
Speaking at a campaign event in Ohio, presidential hopeful Mitt Romney pledged to repeal Sarbanes-Oxley. According to a Wall Street Journal article, Romney's economic plan only seeks to lessen the regulation's burden on mid-size companies. However, when an attendee of the town hall style meeting asked about the prospect of repeal, Romney said "Yes."
The WSJ article says that Romney referred to the act (as well as other regulations such as the Dodd-Frank Act) as "legislative monsters that have been created to kill jobs."
These comments bring to light a conflict that has been raging since 2002: has SOX had a positive or negative impact? Depending on how you look at the issue, the answer is both.
SOX has led to an increase in compliance costs. According to the IPO Task Force, an independent group of venture capitalists and bankers, companies pay an average of $2.5 million when going public to comply with SOX. They pay $1.5 million per year to stay compliant. This is very real money to any organization.
In addition, the task force reports that fewer companies go public now that SOX is in place. Prior to 1999, there were an average of 547 new IPOs per year. Since 1999, the number has fallen to 192. While the IPO Task Force blames SOX, the significant decline in IPOs began in 2001, a year before SOX.
SOX is not all doom and gloom. A 2005 study shows that SOX led to a 10 percent improvement in corporate governance performance of U.S. companies compared to foreign. The passage of SOX also increased investor confidence, as investors value transparency in financial markets. In the two years after SOX's passage, companies with strong internal controls saw their stock prices increase by 27.67 percent, while companies with ineffective controls saw their prices decrease by 5.75 percent.
While the pros and cons of SOX are still up for debate, late last year legislators introduced identical bills in both houses of Congress designed to make it easier for small private companies to go public. The bills specifically relate to businesses with total revenues less than $1 billion, which they call "emerging growth companies."
These emerging growth companies would not be subject to section 404(b) for the first five years after going public. Section 404(b) requires organizations to have management and independent auditors sign off on the effectiveness of their internal controls. If passed, the bills will allow businesses to defer section 404(b) costs, which can easily add up.
The house version of the bill was approved by the Financial Services Committee and will soon face a full House vote. Meanwhile, the Senate bill has been in committee since December 2011.
As long as SOX remains in effect, there will be groups trying to chip away at it. Any debate on the subject needs to focus on the regulation's real problems - as well as its successes - and not on emotions. Unfortunately, when every two years is an election year, and with SOX being a popular political issue, that may be easier said than done.
