Author Archives: Judah Ferst

When do the benefits that come with regulation become an undue burden? The Economist’s article, A Price Worth Paying, examines this question about the Sarbanes-Oxley statute. In the wake of scandals in the early 2000’s, like those at Enron and WorldCom, congress needed to act to calm the public’s fears and the economy. But in doing so, many worry that they went to far and imposed burdensome regulations on publicly traded firms.

The main point of contention is regarding section 404 of the statute, which states that managers are responsible for maintaining an: “adequate internal control structure and procedures for financial reporting” and that their accountants must certify these controls and disclose any “material weaknesses.” Failure to do so could result in criminal penalties.

This section has cost publicly traded companies billions in compliance fees, most of which were paid to their accountants and auditors who, ironically, were the ones responsible for the problems in the first place. As the article highlights that while there may be benefits in having these controls in place, they will probably never reach the anticipated $1.4 trillion. In addition, the Big Four accounting firms are loosing clients because with the increased annual costs to their audits, many firms are looking into smaller accounting practices to handle their books. While many will delight if the accounting field is leveled, one of the Big Four failing would hurt the economy tremendously. We are already seeing negative economic impacts due to Sarbanes-Oxley as many companies are deciding not to go public and foreign companies are choosing not to be listed on American exchanges.

Sarbanes-Oxley, as many laws, was a response to a troubling trend in American businesses. However, at the end of the day, will it actually prevent firms from failing? And if it does, will the economic hardships borne by companies in the meantime be worth it? Unfortunately we are a long way away from even beginning to answer these questions and only time will tell if the price is worth paying.