Jeffrey Marshall discusses Sarbanes-Oxley Act’s Section 404 in his article titled “Are Foreign Issuers Shunning the U.S.?”. This section states: “Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting.”
Mr. Marshall discusses the theory that foreign issuers are running from U.S. exchanges partly because of the costs associated with complying with this section of Sarbox. However, there are other reasons that foreign issuers may list outside of the U.S. For example, many exchanges outside of the U.S. are becoming very liquid and it may be more convenient to just list in the country where the company is located. Globally, exchanges have grown even as some are increasing regulation (i.e. Japan).
I think that accounting regulation, while costly, is necessary in providing comfort to investors (psychologically) regarding the financials being disclosed by public companies. The problem is – how do you quantify comfort? Is this benefit > cost of compliance?
Section 404 may also add one more layer of complexity that makes it difficult for management to get involved in accounting scandals.
