Designed to protect investors and restore confidence in the U.S. financial system after scandals at firms like Enron and WorldCom, the Sarbanes-Oxley (SOX) Act is having positive effects on corporate America. Board independence has been strengthened, accountability is moving back to shareholders, and difficult questions are once again being addressed.
But Section 404 of the legislation, which calls for public companies to establish and maintain an internal control structure for financial reporting, has resulted in implementation costs that have far exceeded original expectations. Because its compliance framework is designed for large, well-established organizations, its costs have hit smaller companies much harder than others, hampering competitiveness and job growth in a vital segment of the economy. SOX has become yet one more burden in the steep climb towards an initial public offering (IPO) that is especially difficult for small companies. Many firms are now choosing to remain or become private, others are considering being acquired, and yet others are turning to international stock exchanges for their IPOs.
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