Heritage Panel Discusses SOX Reform

Yesterday, Rep. Tom Feeney (R-FL), along with Alex Pollack of AEI and David John of Heritage, spoke at the Heritage Foundation on reforming the Sarbanes-Oxley Act (SOX). Passed in the wake of the Enron and WorldCom scandals, the goal of SOX is to tighten corporate governance and remedy the problem of moral hazard in corporations. While most of SOX has proven useful and effective, Feeney identifies Section 404 as the problem. In 404, companies are required to conduct separate comprehensive internal and external audits yearly. Additionally, the outside auditors have interpreted their role as being able to make suggestions about 404 compliance but not being able to explicity tell a company whether or not they comply. 

These extra compliance measures are costing companies, especially companies with small market capitalization, a fortune. It is estimated that the total direct cost of compliance now totals around $35 billion since SOX was enacted, and total indirect costs are estimated at upwards of $1 trillion. While the high costs of complying with redundant audits may be a drop in the bucket for large companies, many small corporations are feeling the squeeze of SOX. This is causing more companies each year to list on foreign stock exchanges when they go public, leading the London Stock Exchange to proudly quip that it is "SOX Free." In addition to discouraging IPOs on the NYSE and other domestic exchanges, the onerous SOX regulations are cause for many companies to go to exclusively private equity. 

But legislation sponsored by Feeney and supported by Senator Jim DeMint in the Senate looks to curb the negative effects of SOX, principally through reform of Section 404. If passed, companies with less than $700 million in market capitalization would not be required to do the external audit. In addition, the legislation would require the external audit every 3-5 years, instead of yearly.