By: Mark Nelson

Sarbanes-Oxley Overview Named after sponsors Senator Paul Sarbanes and Representative Michael G. Oxley Enacted on July 30, 2002 Contains eleven titles, mainly focused on public companies Established the Public Company Accounting Oversight Board (PCAOB)  Section 101 Looked to establish control standards for accounting and accountability and validation for financial statements Description of what happened at Enron and WorldCom included

Sections Section 302 Section 404 Section 101 Section 102 Section 802 Section 1107 Each section has description

Effects on Public Business SEC Chairman Christopher Cox stated in 2007: "Sarbanes- Oxley helped restore trust in U.S. markets by increasing accountability, speeding up reporting, and making audits more independent.“ Has improved investor confidence in financial reporting, a primary objective of the legislation. Financial restatements increased dramatically after it was enacted and have since declined steadily ‘Getting It Wrong the First Time,’ by Glass, Lewis and Co. shows 1,295 restatements of financial earnings in 2005 for companies listed on U.S. securities markets, almost twice the number for ‘That's about one restatement for every 12 public companies—up from one for every 23 in 2004,’ says the report.”

Effects on Public Business Cont’d Firms’ values reacted relatively more positively to the announcement of SOX (Illiev) While the out-of-pocket compliance costs are generally considered substantial (Solomon and Bryan-Low, 2004), the indirect opportunity costs imposed by SOX are likely even greater (Zhang). Negative Effects Effectively paid twice as much in audit fees ($884 vs. $374 thousand per annum), Reduced their earnings through more conservative discretionary accruals Experienced worse risk-adjusted stock returns (of about 19%) over three years.

Effects on the U.S. Economy The market responded negatively to events that signaled increases in the likelihood of passing tough rules and positively to events revealing that no further costs would be imposed (Zhang). “The real cost isn’t the incremental dollars, it is having people that should be focused on the business focused instead on complying with the details of the rules.” – CAO of GM

Effects on Private Business Some have already taken steps to establish an internal audit function, inducting independent board members, adopting a formal code of ethics, and many other aspects of SOX Does not directly affect, but there is much that can be learned from it. Companies can increase efficiency and effectiveness Keeping good and trusting relations with customers and stakeholders Overall business integrity May not always be exempt from compliance in the future

Effects on Foreign Businesses and Economies SOX definitely had a large effect on foreign businesses and economies Companies more directly related to companies in the U.S. were more affected than those that weren’t “Companies operating in countries with high-quality disclosure regimes suffered larger net costs from SOX than companies from countries with lower-quality disclosure” (Litvak). “The strongest stock price reactions are associated with the cleanest events – post-adoption rule-making releases by the SEC”