SOX Center

Since the passage of the Public Company Account­ing Reform and Investor Protection Act of 2002 (the Sarbanes–Oxley Act), small and mid-sized public companies have struggled to comply with its onerous provisions, which created an enormous and dispro­portionate regulatory burden. Most of these costs can be attributed to Section 404, a small section of only 168 words that requires both an internal audit and an external audit of a company’s financial accounting controls.

A growing body of evidence suggests that the unin­tended consequences of Sarbanes–Oxley, especially Section 404, are harming the U.S. economy and its financial industry. However, the problems with Sec­tion 404 are caused as much by how regulators have implemented it and how outside auditors have inter­preted it. While both the Securities and Exchange Commission (SEC) and the Public Company Account­ing Oversight Board (PCAOB) have recently released proposed changes in how Section 404 is imple­mented, it is not clear that these changes will be suffi­cient to affect auditors’ overzealous behavior in an era in which their every action may be subjected retroac­tively to a lawsuit. For that reason, auditors may need some level of protection against legal liability before they feel comfortable with reducing the scope—and cost—of Section 404 audits.

The Heritage Foundation: The Sarbanes–Oxley Act: Do We Need a Regulatory or Legislative Fix?