SOX Center

Says Sarbanes-Oxley creates fear of litigation

A study of 4,000 U.S. companies shows the Sarbanes-Oxley corporate reform law has had a chilling effect on risk-taking as many companies seek to conserve cash instead of developing new products or services, a University of Pittsburgh researcher said yesterday.

U.S. companies significantly cut research and development spending and capital expenditures, while at the same time increasing cash holdings compared with their U.K. counterparts in the period after the 2002 law, the study found.

“I think there is a cause and effect relationship and it runs through the newly empowered independent majorities on the boards of directors of public companies,” said Peter Wallison, a senior fellow at the American Enterprise Institute, a think-tank with close ties to the administration of George W. Bush.

Some members of an AEI discussion panel suggested Sarbanes-Oxley, or SOX, had the effect of introducing independent but risk-adverse directors, as well as creating a fear of litigation.

The Star.com: Reform law chills U.S. risk-taking, study finds

The U.S. Securities and Exchange Commission approved new guidance on Wednesday to help companies comply with what critics say is a burdensome and costly provision of the Sarbanes-Oxley corporate reform law.

The agency, by a 5-0 vote, encouraged companies to take a more risk-based approach to complying with Section 404 of the legislation.

“Congress never intended that the 404 process should become inflexible, burdensome and wasteful,” SEC Chairman Christopher Cox said at the agency’s open meeting.

Section 404 requires companies to assess their internal controls over financial reporting. It also calls for external auditors to report on management’s assessment and on the controls themselves.

Corporations and business lobbyists have complained that Section 404 was too expensive and the SEC has conceded that, in some cases, overly cautious companies caused the law’s costs to exceed its benefits.

Yahoo!Finance: SEC adopts new guidance for Sarbanes-Oxley