Wednesday, June 07, 2006

SOX: No One-Size-Fits-All Solution to Dishonest Accounting

Congress passed the Sarbanes-Oxley Act in 2002 in the wake of notorious corporate failures, but its auditing and reporting requirements -- effective since 2004 for larger and midsize corporations and yet to take hold for the smallest companies -- have triggered complaints about its costs and questions about its effectiveness.

Exaggerated earnings reports, enabled by sloppy or dishonest accounting by overly friendly contractors, artificially inflated stock prices and led to collapses at Enron, WorldCom and other publicly traded corporations. Sarbanes-Oxley's stated goal was "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws." But its requirements for accounting oversight and independence, and its checks on conflicts of interest and fraud, have resulted in a mixed verdict on its effectiveness so far, according to experts at the W. P. Carey School of Business.

Accommodating Sarbanes-Oxley, which has come to be known as SOX, has involved millions in costs for corporations, as thousands of executives and employees undergo special training in how to comply with provisions aimed at effecting accounting reform and investor protection. The task of interpreting and enforcing the 66-page SOX law falls to the Securities and Exchange Commission (SEC), which has been delaying small-firm compliance while the bigger companies blaze the compliance trail.

SOX: No One-Size-Fits-All Solution to Dishonest Accounting

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