| ody"> | | | | The number of companies having to change their |
| The Sarbanes-Oxley Act was passed, in part, to fight | | | | business practices has been large; Hermanson, |
| the evils of unethical behavior. Has it been worth the | | | | Ivancevich, and Ivancevich have noted that 55% of |
| cost? The verdict on the efficacy of S-Ox is still an | | | | public companies have changed revenue recognition |
| open question, though initial indications have been that | | | | policies, and 8% have had to file earnings restatements |
| §404 has been successful in improving the | | | | (2008). They do note, though, that internal control |
| transparency of financial reports along with the | | | | weakness reports have been declining among larger |
| reliability of financial reports. These benefits have not | | | | companies, and that this is a demonstration of the |
| come without costs, however, including an increase in | | | | effectiveness of S-Ox, particularly § 404 |
| privatization, smaller profit margins, and an increase in | | | | (Hermanson, et al., 2008). |
| redundancy costs. This analysis seeks to balance | | | | However, the benefits have not come without a cost. |
| some of those costs against their benefits. | | | | Dodwell notes the costs as including smaller profit |
| A trend towards increased privatization of formerly | | | | margins due to increased compliance costs, |
| public companies was apparent even before S-Ox | | | | opportunity costs of deciding not to pursue some |
| was signed (Megginson & Netter, 2001), though | | | | otherwise economically valuable opportunities, |
| there has been some speculation that privatization has | | | | redundancy costs, increased costs to hire auditors |
| increased even more because of S-Ox (Dodwell, | | | | (whose hourly rates have increased due to greater |
| 2008). There have been some benefits, Dodwell | | | | demand), and an increase in the number of companies |
| asserts: transparency and reliability of financial reports | | | | deciding not to be listed on the U.S. stock exchanges |
| has increased, motivation to improve transaction | | | | but instead seeking foreign listing (2008). |
| controls out of fear of failing an audit, emphasis on the | | | | In the long run, will the benefits of the Sarbanes-Oxley |
| control environment and mindset, and even the use of | | | | Act prove to be worth the costs? The initial reports |
| S-Ox documentation as a training tool for new | | | | suggest that the answer may be a qualified yes. |
| employees and a backup and communication device | | | | References: |
| (2008, p. 40). | | | | Dodwell, W.J. (2008, August). Six years of the |
| One of the largest private companies in America, | | | | Sarbanes-Oxley Act: Are we better off? The CPA |
| Hospital Corporation of America (HCA), owns, | | | | Journal, 78(8),38-43. |
| manages, or operates 169 hospitals, along with many | | | | Hermanson, D.R., Ivancevich, D.M., & Ivancevich, |
| surgery, imaging, radiation, and rehabilitation centers, | | | | S.H. (2008, October). Sox section 404 material |
| was public from 1990 to 2006, when it was taken | | | | weaknesses related to revenue recognition. The CPA |
| private. Like Henry Ford taking Ford Motor Car private | | | | Journal, 78(10), 40-45. |
| in 1916 after being ordered by a court to pay out | | | | Megginson, W.L. and Netter, J.M. (2001, June). From |
| retained earnings to shareholders (Dodge v. Ford | | | | state to market: A survey of empirical studies on |
| Motor Co., 204 Mich. 459 (1919)), HCA did not want to | | | | privatization. Journal of Economic Literature. |
| live by the Sarbanes-Oxley rules. | | | | |