Disadvantages Of Sarbanes Oxley Act
The Sarbanes Oxley Act of 2002 was meant to restore the lost faith of the investors in the U.S. securities market which badly hurt the U.S. economy. While the Sarbanes Oxley Act impact in long term is still debatable, the disadvantages of Sarbanes Oxley Act have become visible with the passage of time. This has also led to people looking for Sarbanes Oxley solution.
Basically, the act brought about radical changes in four key areas, namely corporate responsibility, new criminal penalties, accounting regulations, and new protections. However, the most commonly cited disadvantage is its extreme cost of compliance on the small businesses. The act has made the companies with$100 million revenue spend as much as 2.55% of their revenue in ensuring Sarbanes Oxley Act compliance. This has badly affected the flow of funds in these small companies.
Another disadvantage is that the Act creates unnecessary bureaucratic burden on the management as well as auditors. With a number of reports needing to be prepared, certified, filed in publicly declared and what not, the act has created excessive stringent procedures. It seems that all the management has to do is make reports, sign reports, certify reports, publish reports and whatever else that can be possibly done with reports.
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The Sarbanes Oxley Act has been criticized by auditors because it has created a number of new responsibilities which challenges there work procedure, but also makes it possible for people to question the objectivity of the auditor. This has given way to bringing about a completely new auditing standard. The difficulty of Sarbanes Oxley Act is that auditors are now supposed to audit on new parameters which they are just not trained to do. The auditors complain that the new act makes it necessary for them to audit the IT security infrastructure of the company. Because IT plays a vital role in managing financial information and enabling compliance, auditors would now have to start thinking from an IT perspective to effectively audit the authenticity and effectiveness of the measures of internal control over financial reporting. Another major disadvantage factor is that the act seemed to be a hastily designed stop gap measure. The industry had no time or prior preparation to digest the new changes. To make things more difficult, the period of compliance was kept very short and the companies had to start action on a war footing. This resulted in confusion, poorly understood roles and a number of things to catch up with. Last but not the least, the punishments for violation of the act may also be counted among the disadvantages of the Sarbanes Oxley Act. Ten years in prison and fine of $ 1 million seems too much for an Sox infringement. While the disadvantages of Sarbanes Oxley Act are well known, the act has been hailed as the most sweeping act in recent times. |
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