NCPA - National Center for Policy Analysis

REFORMING THE REFORMS

October 10, 2005

Sarbanes-Oxley (SOX) benefits shareholders by forcing public companies to focus on proper accounting procedures, internal controls and fraud detection. However, SOX has produced unintended consequences as well, say former Senators Bob Dole and Tom Daschle.

Consider:

  • Auditor bills have doubled or tripled for emerging companies, sometimes making the difference between a profit and a loss for them; additional compliance costs for companies average $1.4 to $4.4 million.
  • The number of publicly-traded companies going private tripled in 2003.
  • Some smaller companies are selling themselves to larger companies in order to help absorb compliance costs, resulting in diminished competition and innovation.

According to Dole and Daschle, Congress should consider the following changes:

  • Congress should allow the Securities and Exchange Commission (SEC) the authority to audit smaller companies less frequently than once a year.
  • Congress should evaluate the practicality of applying a risk-based approach to auditing -- applying stringent review to revenue recognition issues, but less so to travel and expense reports.
  • Moreover, regulators should be more flexible with emerging companies pertaining to expensing options, which can impede growth.

Source: Bob Dole and Tom Daschle, "Let's Reform the Reforms," Wall Street Journal, October 3, 2005.

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