Literature Review: Sarbanes-Oxley Act

1. Literature Review: Sarbanes-Oxley Act Lindsey Lee Maloy

2. Background • Sarbanes-Oxley Act (SOX) of 2002 was passed through legislation with the purpose of forcing honesty and accountability in corporate America. • SOX was a reaction to a few large fraud scandals. • SOX forced CEO’s and CFO’s to be held accountable. • SOX has implemented tight provisions on external auditing and internal controls.

3. Thesis • Current research (2002-2014) shows that SOX has forced many businesses out of the public and into the private market due to high SEC regulatory costs and the more serious impact on small companies versus large.

4. Costs of SOX (Body Paragraph 1) • Bartlett, Kamar et.al, and Sinnenberg believe that even if a public firm switches to private, there will still be high costs associated. • According to Bartlett, Srinivasan, and Chandra, these costs related to moving private are sometimes continued regulatory costs because financial institutions require them or the need for internal controls. • Kamar et. al and Shear also make the statement that smaller firms lack economies of scale. • Indirect costs need to be accounted for when looking at the overall costs of SOX according to Bartlett, Kamar et.al, Srinivasan and Chandra, and Sinnenberg. Bartlett is the only one who gives examples of indirect costs. • Giordano also contrasts this idea of continuing high indirect costs of SOX by saying firms will just leave the country.

5. Costs of SOX(Body Paragraph 2) • Long term effects of SOX • There is research on immediate results of SOX, but not as much on how it is impacting firms 12 years after the act was put in place. • Bartlett says “The amounts of firms going from public to private have almost doubled since 2004” (2). • Use Sinnenberg as an example because his work is older and closer to the date of the installment of SOX • This provides a scope limitation • There are some newer articles such as Srinivasan and Chandra’s because it was published in 2014. • Example: An instance where the long term impacts of SOX briefly relay current state of research is when Kamar et.al says that the costs of SOX at first was extremely high, but once firms moved around or got used to the new regulations the costs of SOX decreased.

6. Impact on Small versus Large Firms (Body Paragraph 3) • Research agrees that the financial burden of SOX on small firms was much greater than on large firms, therefore forcing the smaller firms to move to the private sector • Giordano explains how smaller firms have smaller budgets and lower profits, therefore the costs of SOX are too high to remain in the public sector, forcing them to go private. • Kamar et.al and Frankel agree that the two choices of a small firm under SOX provisions are to sell the firm or move it to the private sector. • Shear and Franzel say, “Smaller companies pay higher audit fees than larger companies as a percent of revenues” (5). • Kamar et.al and Shear relate when they discuss in their research the impact SOX had on small firms’ lack of economies of scale. • Research agrees that internal controls are the highest cost of SOX.

7. Impact on Small versus Large Firms(Body Paragraph 4) • Internal controls is a component of SOX with the highest cost, which has helped push small public firms into the private market. • Kamar et.al and Srinivasan and Chandra state that most small firms did not have internal controls before SOX and if they did they were weak. • Srinivasan and Coates decide through their research that every firm should have internal controls even without the forced compliance that SOX imposes. • Coates, Tamar Frankel, and Ronald Giordano explain how internal controls has affected small firms much more than large firms and that they should have less rules to follow due to the disproportionate burden. • Once again Giordano gives examples on how to mitigate risk for smaller firms, which no other author has done.

8. Impact on Small versus Large Firms(Body Paragraph 4 continued) • Srinivasan is the only researcher who mentions how the internal control provision of SOX has damaged the supply chain by forcing third party logistics to comply with internal controls as well. • Shear and Franzel also discuss indirect costs related to internal controls due to SOX compliances, but they do not go into specific details like Srinivasan does. • The overall impact of SOX on small firms is much greater than on large firms. Internal controls is one of the compliances that has made costs too high to maintain for small firms, therefore forcing them to the private sector.

9. Recommendations • The current state of research provides evidence that SOX has pushed many public firms into the private sector due to high regulatory costs, especially small firms. • More research on the long term impacts of SOX, the overall costs of SOX, and the affect of SOX on the supply chain would be helpful in determining what SOX has done for corporate America. Once this has been done, suggestions for future legislation can be made.