Sarbanes-Oxley bleeds profits, cuts risk taking

Professor Bainbridge reports on the regulatory disaster called Sarbanes-Oxley(SOX):

According to The Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30 percent, or even more, due to the tougher audit and accounting standards imposed by SOX.

The chief regulatory culprit is SOX section 404, which requires both management and the company’s outside auditors to annually assess the firm’s internal controls over financial disclosures. The Securities and Exchange Commission initially estimated that section 404 compliance would require only 383 staff hours per company per year.

According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues spend an average of $4.7 million per year to comply with section 404.


The survey also projected expenditures of 35,000 staff hours — almost 100 times the SEC’s estimate. Finally, the survey estimated that firms will spend $1.3 million on external consultants and software and an extra $1.5 million (a jump of 35 percent) in audit fees.

To be sure, some of these costs were one-time expenses incurred to bring firms’ internal controls up to snuff. Yet, many other SOX compliance costs recur year after year. For example, the internal control process required by section 404 relies heavily on ongoing documentation. As a result, firms must constantly ensure that they are creating the requisite paper trail.

You thought George Bush was for "free market" economics.Guess again.