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.