To address reform of the Sarbanes-Oxley Act of 2002 (Sarb-Ox), recall that it was passed in the political furor following the Enron and WorldCom scandals to try to prevent future accounting frauds. Let's start with its most obvious, largely unintended, consequences. Sarb-Ox, with its notorious Section 404 requiring internal control certifications in particular, has created a tremendously expensive amount of paperwork and bureaucracy. In the Sarb-Ox economy it seems that everybody audits everybody else.
Not only is this exceptionally costly, but it is far more costly -- about 50 times more -- than the SEC estimated it would be. Virtually every audit committee around the country has helplessly watched its audit fees escalate dramatically. The explicit costs alone are extremely high and disproportionately high for smaller companies.
The implicit costs of diversion of employee and management effort are also high. The opportunity costs are high. The total costs far outweigh the benefits that are likely to arise from them, especially for smaller companies.
Part of the reason for this disproportional impact on smaller companies is that the implementation of Section 404 in particular has taken a brute force approach, like the airline security line, where respectable citizens have to take their coat, belt, and shoes off. Similarly, accountants are going through companies with no sense of proportion or materiality.
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