SOX Benefits not Worth the Costs

May 10, 2006 ( - Despite a reduction in the compliance costs of the Sarbanes-Oxley Act (SOX), 72% of directors surveyed say they do not believe the benefits of SOX have been worth the costs.

An RHR International news release said respondents to its survey report a 75% decrease in compliance costs in 2005 and believe costs will continue to decrease.   Even so, directors report a negative impact of SOX on the average CEO’s risk tolerance.

Twenty percent of directors believe their organization’s CEO has become inappropriately risk-averse in decision making as a result of SOX oversight. “The effect on a corporation can be devastating when a CEO is afraid to make difficult decisions,” said Constance Dierickx, a Senior Consultant with RHR International, in the release.

In addition the survey revealed that nearly 25% of board members do not gather information on their own, independent of the management team. “Fully four years after Sarbanes-Oxley, too many boards are still being spoon-fed information by management,” said Dierickx, in the release. The study found that 14% of the directors surveyed have resigned from a board or chosen not to join one because of concerns regarding personal legal and/or financial risks.

One-in-four directors of publicly held corporations report receiving information in their board book that is only “somewhat” pertinent and complete. In addition to receiving poor materials, almost one-third (29%) say they receive meeting information fewer than four days in advance of a scheduled meeting, while most (71%) would prefer to receive the materials at least a week in advance.

Additional survey findings include:

  • Board members spend 15% more time on board activities than they did in 2004.
  • 91% of board members surveyed say they have candid conversations with the management team of their organization.
  • Nearly 80% of board members encourage, challenge and assist their CEO in developing current and future leaders.
  • Two-thirds of board members state that their board links performance in leadership development (among the management team) to the CEO’s overall compensation.

Securities and Exchange Commission Chairman Christopher Cox said Wednesday that SOX is a good idea, but has not always worked effectively in practice, according to a MarketWatch report. At a conference, top securities and accounting regulators said they are open to suggestions about how to change the law.

Cox made it clear he is open to changing the rules, saying SOX has “great potential” to improve financial reporting, MarketWatch reports.

The SEC and the Public Company Accounting Oversight Board have been the subject of intense lobbying by companies who say the requirements of the law’s Section 404 internal control requirements are too onerous. Small companies, in particular, say the requirements are expensive, forcing them to hire costly auditors and buy new software.

Monday, the Government Accountability Office released a study that found small businesses’ costs for implementing the rules are disproportionately higher than bigger firms’, and that more companies have gone private to avoid the law’s requirements (See GAO: Do not Roll Back SOX Too Far ).