Few pieces of legislation are as controversial to the business community as the Sarbanes-Oxley Act of 2002. Passed during the fallout of the Enron and Worldcom accounting scandals, Sarbanes-Oxley, typically abbreviated SOX, requires the CEO of all public companies to personally certify the accuracy of their organization's audit reports.
With many organizations claiming that the rules are too expensive and time consuming to follow, all eyes have been on a recent court case challenging the legitimacy of the law. Unfortunately for them, the court ruled in the government's favor.
The purpose of the case was to determine whether the creation of the Public Company Accounting Oversight Board (PCAOB) violates the Constitution. The PCAOB is a non-profit committee whose members cannot be removed by the President. They are instead chosen by the Securities and Exchange Commission and serve five-year terms.
According to a U.S. Federal Appeals Court which heard the case, the existence of the PCAOB does not violate the constitution. The decision isn't too surprising, considering the organization isn't technically a government agency. It shares things in common with industry self-regulating bodies such as the New York Stock Exchange. However, the PCAOB does have considerable authority compared to the NYSE and the members are not subject to executive branch oversight.
Although this latest appeal failed to overturn SOX, the organization that filed the initial charges, a small Nevada accounting firm, plans to carry the case all the way to the Supreme Court if necessary.
Read the full story at The New York Sun.
While this issue will likely not be put to bed for a long time, just how onerous are SOX regulations to follow? How much money and time does it actually cost companies? Depending on where you look, the answer is going to be different. Some studies claim the costs are too high, while others say they are not.
According to a survey published recently by Compliance Week, many companies are reporting that the costs of conducting financial audits have fallen 0.3 percent in 2007. This is the first decrease since SOX was passed. While SOX was expensive to implement at first, companies are starting to get the hang of it.
However, many SOX opponents blame the law for a decline in initial public offerings on the stock market. The theory goes that companies are refusing to go public for fear of SOX and are instead listing on foreign markets. In the years since SOX was enacted, IPOs have consistently fallen. When surveyed, companies blame the problem on SOX, as well as on the credit crunch and skittish investors.
Regardless of an organization's opinion of SOX, it or something similar is clearly needed to prevent the massive accounting scandals that gave birth to the law in the first place. And unless a higher court decides otherwise, SOX is here to stay.
