This question was put to Loews Corporation CEO James Tisch. His answer is splendid:
It’s probably doubled our accounting fees. And I would say that about eight and a half percent of that reflects value to the company. So there was some value from Sarbanes-Oxley, but we are paying an enormous price for that value. And a lot of it is make-work. A lot of it is just checking that you’ve done something, that you had written the right procedures. It’s mindboggling how much work it is and how expensive it is.
Along with Sarbanes-Oxley came what’s called the Public Company Accounting Oversight Board (PCAOB). And the PCAOB is there to grade the accountants. So the accountants, because of the PCAOB, are unwilling to work with the managements of companies because they know that they’re going to be scrutinized by the PCAOB. So there’s much less of a collegial atmosphere between the company and its auditors and it’s become somewhat more antagonistic. I don’t believe that’s in anybody’s best interest at all.
Sarbanes-Oxley Section 404, which created a lot of these problems for corporations, is exactly two paragraphs long. And from that spawned this enormous industry of scrutiny and oversight of financial statements. So it just shows you just how powerful Congress can be. And the sad thing is there was a problem. There were some companies that were doing bad things. Auditors missed certain things. But I would submit to you that it was just a small number of companies. Very small, I mean, a handful. And as a result of their actions, every listed company now has to comply with these rules.
So yes, there is some value that comes out of SOX, however, it’s a very expensive way to gain value, and also, the company’s executives are not making the decisions as to where the value will be added and how much should be spent/budgeted in order to achieve its goals. SOX is a coercive affair that burdens companies with loads of useless documentation and retention and fritters away valuable resources (people and time) on non-value added processes that would otherwise not be undertaken. As to his make-work comment, as we SOX managers like to say, “it’s great work if you can get it.” Tisch also makes the great point – not often heard – that the PCAOB monster has destroyed the relationship between the company’s management and its auditors. There used to exist a relationship where auditors would advise, lay out expectations, and generally guide the client through the known rules, along with their own peculiar protocols. Now the auditor-client relationship is more of a game, and it’s definitely antagonistic. It has become much more difficult to ask questions and get specific answers. We’re often left to hang, guessing at a question while being expected to answer it correctly. It’s like someone telling you “don’t speed” on the highway, but refusing to post the speed limits.
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The last paragraph may as well have described how the EPA and DOJ approach compliance with the Clean Water Act. Arbitrary powers enforced on everyone.
SOX is a joke and so are accounting standards in the US (and around the world). Market discipline is the only accounting standard anyone needs. It tells you something that in this supposedly enlightened age of accounting, post-SOX, that we still have an entire industry (banking) which continues to operate through insolvency.
My daughter, a CPA, is very happy with SOX. But it amounts to group punishment: every corporation in the nation must suffer for the actions of a few.
My friend was a para-legal in DC after SOX. His entire job that paid $35k+ annually was filling out the paperwork for SOX.
And it doesn’t seem to have solved too much…
Lawyers and accountants and economists, and of course politicians, are the ‘professions’ benefitting from this intervention.
Those directly involved in its origin and in its application that are connected to the politicians (interventionists) are extortionists. Is that a crime or is it a profession now that the word ‘is’ has been modified.
Karen, isn`t SOX a great barrier of entry to the capital markets, and thus helpful in ensconcing large firms, and insulating management from competition?
There has been a huge controversy over SOX. For the first time since the 70′s there were no IPO’s in the Silicon Valley. For new tech startup’s, the option is quickly becoming a goal to get bought out or if you want to go public, go public on foreign markets. It is unfortunate that a the government takes forever to revoke actions which have later been proven to be wrong. So if this is wrong, it’s going to be here for awhile. Companies need to start focusing on the solution now and not the problem. The solution is finding a way to automate all these manual tasks, so you don’t have to pay someone to look over your files, and pay another person to look over what he did, and so on…
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