Does SOX enhance firm's value? 1900



  • Hi everyone,
    I have no doubts about the fact that SOX, if correctly implemented, can provide real benefits to company’stakeholders. But has it been proved empirically (by academic papers) that SOX enhance firms’value?
    And if most companies complain of the high costs of compliance, is it relevant to say that small and mid caps and foreign companies should be exempted from SOX compliance? You would agree that SOX impact negatively their competitiveness and instead of focusing on their business activities, they have to spend time and money to be compliant. So would you say they have to choose between compliance or competitiveness? SOX should only be required for large companies?
    To this end, do you think SOX should be changed? and what?
    And finally I’m a bit confused concerning companies delisting from the stock exchange. Some ‘go dark’ and some go private. I’ve understood companies going dark, will continue to trade on the Pink Sheets so according to what factors, companies decide to opt for either going dark or going private.
    I would appreciate if you please shed light on this
    Thank you very much,
    Best wishes to you all,
    Arnaud



  • Hi Arnaud - This is a good question 🙂 There are differing viewpoints on whether the efforts of SOX provide the cost/benefits to stockholders. Overall, I’d probably vote ‘yes’ for the following reasons:

    1. I think SOX 302 alone makes a difference as company executives must sign on the dotted line and be personally liable if they willingly cheat in valuations or stated income. Many of my viewpoints on ‘benefits’ are summarized in the forum link below:
      http://www.sarbanes-oxley-forum.com/modules.php?name=Forums-and-file=viewtopic-and-p=6777#6777
    2. The DOW JONES index has almost doubled since 2002. Much of this is associated with pulling out of a recession, a war economy and M-and-A activity. Investor confidence has improved based on a # of factors. Most investors probably believe that an scandal as large as Enron won’t happen again. SOX is only one of many factors that would contribute to investor confidence.
    3. SOX is required by law and public companies don’t have an option if they fall into the guidelines for needing to be compliant. While as with any regulation, guidelines could be further improved, esp. some of the nebulus and vague areas. SOX definitely has an increased cost to companies that will vary based on how well their pre-SOX controls were and their levels of automation (e.g., lower costs can be obtained by using electronic capabilities rather than paper-based controls). This thread discusses some of the possible changes coming in 2007:
      http://www.sarbanes-oxley-forum.com/modules.php?name=Forums-and-file=viewtopic-and-t=1890
    4. SOX is one of the better known laws for those in the general public. When you add up the additional audit and internal costs, it’s definitely costing companies more and taking away from their bottom lines possibly. Still, I’d probably say that general public sees the benefits of SOX providing lots of controls for preventing another huge Enron-like scam, rather than adding overhead to each of the public companies?


  • Interesting question…how does one prove empirically (by experimental observation) that a company has benefited from implementing SOX?
    It seems reasonable to conclude that the value derived depends on who you ask, when you ask, and by the selection of measurement criteria used to quantify the incremental benefit a post SOX implemention.
    A debate on the value derived after a SOX implementation would likely last longer than the life of SOX itself. Additionally, an academic paper on this subject could be challenged from many angles.
    SOX isn’t going away, so to hack from a phrase made popular by Star Trek, ‘Resistance is Futile’.



  • Some of the changes required by a SOX self-assessment include evaluating the risks that your own employees/consultants/executives can deliberately or inadvertently corrupt your accounting.
    I would think that any methodology that forces a company to periodically look at all these risks, and then take measurable steps to mitigate them. will benefit that company measurably.
    IT and Accounting security assessment is just a fraction of SOX compliance, but it’s a fraction that seems to me to pay off.



  • I would think that any methodology that forces a company to periodically look at all these risks, and then take measurable steps to mitigate them. will benefit that company measurably. IT and Accounting security assessment is just a fraction of SOX compliance, but it’s a fraction that seems to me to pay off.
    Hi Steven and welcome to the forums 🙂 I also agree with this excellent point, as the SOX Risk analysis on financial exposures can help a company evaluate and improve these vital controls.
    Using the Search button above and by entering Benefits as the search keyword, our members can see that we’ve often discussed that SOX isn’t totally a waste of USDUSDUSD or resources. For example, meeting SOX might be the key ingredient for:

    • Better automating an inefficient workflow that might save the company time and improve customer service
    • Moving from paper to electronic storage tools (e.g., imaging) … Although the 1st company I worked for insisted on paper and we seemed to go in the opposite direction 😉
    • Making financial systems a little more accurate, with improved real-time data for improved management decision making
    • Improved computer security controls might be realized through SOX 404
    • Improved documentation
    • Improved off-site storage
      I also believe that a company that is more confident on their financial data might improve customer service and it could ultimately transcend into improved investor confidence.
      Finally, what I’ve shared above is most likely a ‘best case scenario’, as there are real added costs, some ambiguity in SOX language, and increased work to meet compliancy that will certainly offset the tangible and intangible benefits related to SOX improvements. Thus, the middle ground of ‘costs v. benefits’ is where we all struggle in trying to measure SOX effectiveness.
      Still it’s a cost of doing business if you have to, and thus I would encourage everyone to do a quality job and not just ‘get by’, as you’ll get out of it what you put into it normally. Maybe taking a few extra steps to automate, secure tools, or improve workflows could make all the difference in the world?

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