Author Archives: yossi.malka

The main objective of the Sarbanes–Oxley Act is to avoid frauds. Section 404 of the Act requires management of public companies and the external auditors to report on the company internal control over financial reporting.  In order to comply with this requirement, companies need to pay a lot of money. According to information I could find online, the accounting and auditing costs could increase by 30% to some companies, mainly the smaller ones.   

I believe that these extra costs are high enough to discourage companies from issuing in the US stock market, and I do have some doubts regarding the effectiveness of this section in the Act. When I read a little bit about this Act I could think of a person putting his hand on the bible to be sworn to tell the truth before testifying in court.  Indeed, this Act gives and explicit responsibility to mangers regarding financial reports of their companies. However, without being too familiar with the details of the Act, I believe that managers who are determined to commit a fraud will do it regardless of this Act, same as a person who testifies in court can avoid telling the truth even after swearing with a hand on a bible.  The act sounds more symbolic than effective to me. And even if this Act is effective, the question what is the trade off?  How many frauds would be avoided compare the money lost from companies that avoid issuing in the US?  We have to remember the opportunity cost. I believe, and again maybe I underestimate the effectiveness of this act, that at the end of the day, the American public loses more than it benefits from this Act. I think that the American public would better off had the legislators could think of severe punishments to managers who commit frauds.