Sarbanes-Oxley Act Disadvantages

The Sarbanes-Oxley Act was passed in response to the financial collapse of Enron, Global Crossing and WorldCom.

The Public Company Accounting Reform and Investor Protection Act of 2002, more commonly known as the Sarbanes-Oxley Act ("Act"), was a financial reform enacted to require strict financial disclosure from publicly traded corporations to investors and regulators, as well as separate corporate accounting from corporate finance. In the nine years since the Act was passed, corporations have lobbied for the law's requirements to be relaxed or abolished due to perceived disadvantages.

Increased Auditing Costs

Section 404 of the Sarbanes-Oxley Act requires corporations to create internal controls that separate its corporate accounting department from its corporate finance division to avoid a conflict of interest. This section further requires corporations to submit an annual internal control report that is validated by an outside independent auditor to the U.S. Securities and Exchange Commission and shareholders. Many corporations complain that this section of the Act has imposed unnecessary fixed costs that harm profits and hurt shareholders' investments more than protect them.

International Competitive Disadvantage

Critics of Sarbanes-Oxley claim that the strict financial regulations and disclosure provisions of the Act place American corporations at a competitive disadvantage compared to foreign companies who are not subject to the law's requirements. In addition to overseas corporations not having to incur the added auditing expenses that Sarbanes-Oxley imposes, they are free to set their internal corporate governance in any manner the directors deem fit. This criticism has largely become moot as Japan, Canada and the European Union adopted similar corporate regulations after the Act was passed in the United States.

Political Philosophy Concerns

Conservative critics of Sarbanes-Oxley complain that the law constitutes an intrusion by the federal government into corporate law, an area of legislation traditionally regulated by each state. Indeed, as the Act makes acts related to improper corporate accounting federal criminal violations, Sarbanes-Oxley granted federal law enforcement new authority to scrutinize corporate finance.

It Is Ineffectual

Another criticism of Sarbanes-Oxley is that it failed to prevent the financial collapse of the U.S. economy starting in 2008. Specifically, the provisions in the Act were ineffectual in preventing, or at least allowing regulators to uncover, the multibillion dollar financial fraud occurring at Lehman Brothers and AIG, as well as by Bernard Madoff.

References

• "Loyola University Chicago Law Journal"; Sarbanes-Oxley Five Years Later...; Cheryl L. Wade; June 2008
• "Inc." magazine; Sarbanes-Oxley Draws Renewed Criticism; Laura Rich; January 2005
• St. John's University, College of Business Administration: Sarbanes-Oxley: An Overview of Current Issues and Concerns; Lisa McCauley Parles, et al; Spring/Summer 2007
• "The Washington Post"; Lawsuit Threatens Sarbanes-Oxley Act; Jane Bryant Quinn; July 2008
• American Enterprise Institute: Sarbanes-Oxley and the Financial Crisis
• "Fortune" magazine; Is Sarbanes-Oxley a Failure?; Katie Benner; March 2010