Debating the Myths and Realities of Sarbanes-Oxley

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DECEMBER 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.

The 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 mentioned.

What 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.

Many 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.

The 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?

Philip J. Clements
Chester, N.J.

The authors of “Chilling Effect” respond:

The 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.

Lynn Stephens, PhD, CPA
E. Clair Daniels Professor of Accounting
Robert Schwartz, PhD
EWU Foundation Distinguished Professor of Entrepreneurship
Eastern Washington University
Cheney, Wash.

Editors’ 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 otherwise noted.





















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