Disadvantages of SOX

• Date: May 24, 2010
• Source: Admin

In 2002 the Sarbanes Oxley Act was introduced to revive the lost faith of the investors in the U.S. securities market which was in a pitiable condition due to some high profile financial scandals that took place during that time in the U.S. economy.

The Act brought a few revolutionary changes mostly in four key financial areas - corporate responsibility, accounting regulations, new criminal penalties, and new protections. However, while the advantages of the SOX are yet to be seen, disadvantages of the act are already surfacing and fetching some serious concerns of finance pundits.
 
Disadvantages of SOX

Disadvantages of the SOX act are:

SOX – An Expensive Act

The most common disadvantage of SOX is that, for a small size industry, being compliant to SOX is an extremely expensive affair. Due to this act, companies with$100 million revenue spend almost 2.55% of their revenue in ensuring Sarbanes Oxley Act compliance which has negatively affected the flow of funds in these small companies.

Multiple Interpretations

According to finance experts, SOX RCM guidance gives rise to multiple interpretations. As a result, outcome of one audit firm differs from the other which increases confusion of the audited company.

Major Burden on Management and Auditors

Another major disadvantage of the Act is that it, needlessly, encourages a bureaucratic burden on the management and on the auditors. The excessive pressure on the management to prepare, certify and file reports has put an undesired burden on the management and incidentally slows down the function of the management.

Additionally, the Act has cornered the auditors by introducing a number of new responsibilities and parameters which the auditors are not known of and by making people question the auditors about their objectivity.

A Stop Gap Measure

Looking at the wide range of disadvantages, people now have started to believe that SOX was just a stop gap measure created to solve the financial problems for the time being.  As the industries were not given enough time or prior preparation to understand and then implement the new changes, the Act has nothing but augmented confusion and problems across the industries. To make things more difficult, the period of compliance was kept very short and the companies had to start action on a war footing again fueling the confusion related with the Act.

However, even after accepting the disadvantages of SOX are well known, the act still has been considered to be the most comprehensive act in recent times.