How effective will SOX be in preventing future scandals? 1899

  • Hi everyone. I was just wondering what people’s views were on the SOX being well-intentioned, however not being very effective in preventing future corporate scandals :?:

  • Hi and welcome 🙂
    ‘Prevent’ is perhaps too much of an expectation … While most folks are decent and honest, particularly those executive who lead companies, there will always be a few who want to cheat the system and they may find a way, as SOX can only go so far in controlling behaviors.
    For example, even with SOX and it’s stiff penalities, we’re seeing an occasional prosecution by the SEC. Thankfully, these are few-and-far between and aren’t of the order of magnitude of Enron for example.
    I do believe SOX 302 alone is a great control to discourage such practices and greatly reduce major deceptive reporting scams that would give potential stock buyers a misrepresentation of the companies earnings or true worth. As executives must sign and be personally liable, it’s in their best interest to be honest and ensure conservative accounting practices are utilized in representing assets that might have spectulative valuations.

  • That’s a great reply thank you 🙂 …also however, if many companies de-list from the US stock exchange because they find complying with the SOX too expensive and pressurizing, how is the SOX going to impact much? Can companies that are not listed on the US stock exchange and that do not have to comply with the SOX act still commit fraud like Enron did? (I’m sorry if this sounds like a silly question, i’m just a little bit confused :?) thank you. 🙂

  • however, if many companies de-list from the US stock exchange because they find complying with the SOX too expensive and pressurizing, how is the SOX going to impact much?
    Most ‘de-listed’ companies still need to be audited annually or have some type of controls , e.g., in the USA, ‘Uncle Sam’ will check things out via the Internal Revenue Services 😉 8O 8O 8O
    Even in the ‘de-listed’ situations, I think the advent of the Enron scandal (the most notable among several companies cheating), plus SOX has made a permanent difference. Most audit firms evaluating these companies will most likely use improved audit standards than what we saw prior to 2002, (i.e., whether a company is required to adhere to SOX or not).
    I think SOX provides at least a minor paradigmn shift, whereby companies that participate in external audits to affirm their income, asset vaulations, stated liabilities, etc.; are going to have to be more accountable and accurate in even private required disclosures.

  • Would you say that it is fair to say that the benefits of the SOX act are more long-term and therefore because it is such a huge legislation, we cannot see its benefits straight the way?

  • Hi Ash-
    When you mention companies that ‘de-list,’ are you referring to companies that go from public to private? Or are you talking about public companies that have been taken off their listing exchange for whatever reason? If you are referring to companies that have gone private, then yes, you are correct. SOX will have very little impact on those companies because private companies are not subject to SOX regulations per se. When most people talk about SOX, they are really just referring to Section 404 of the Act; that section discusses management’s requirement to ‘sign off’ on their company’s internal controls over financial reporting. Since private companies do not file financial statements with the SEC, SOX does not necessarily apply to them.
    However, since SOX was implemented as a measure to ensure transparency in companies, all companies would benefit from its implementation. At the very least, by taking a hard look at internal controls, even private companies can streamline their operations. To answer your question, in that case, yes, SOX’s benefits would be long-term.

  • Would you say that it is fair to say that the benefits of the SOX act are more long-term …
    As starting point, often when government intervenes there is little perceived value or benefit. No one welcomes increased regulations, recordkeeping, controls, etc … Even the SEC chair recently stated that ‘Sox is costly companies more than it’s benefiting shareholders’ overall.
    With that said, I still see some benefits associated with SOX near term for a company if they truly do a good job and improve their finanical controls and recordkeeping as a result:

    1. SOX 302 is a great self regulatory control, where the executives must signoff on the accuracy of financial results with possible penalties for irregularities. That can bolster investor confidence some and is probably the best part of SOX.
    2. For a highly disciplined company with great controls, SOX should almost ‘drop in’ with minimal overhead. Where folks have went wrong is misinterpreting controls or thinking they have to collect reams of paper (rather than using e-Libraries). If companies don’t invest in training and planning for doing SOX correctly, it’ll cost them dearly (maybe 2X the amount of a well done implementation)
    3. SOX can help improve practices and workflows that maybe weren’t the best in the past.
    4. Maybe with BETTER and MORE ACCURATE financial data, the company can plan better, improve decision making, and even invest better. There are certainly benefits associated with having more accurate records and financials.
    5. SOX 404 might help companies improve their security and IT controls, if they had prior weaknesses.
      Most of these benefits are intangible, but can also be material if companies use the effort they have to expend anyway and get the most out of their SOX implementations.

  • Thank you both so much. You have both been very helpful 🙂

  • Very Interesting discussion guys. Ash, you raise some very interesting points. I hope this information is as useful to you as it is to me.

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