In 2002, after the well known collapse of Tyco, Arthur Andersen and Enron firms due to accounting fraud and abuse, new legislation was signed to tighten up corporate accounting. This bill is known as the Sarbanes-Oxley Act, which, among other things, created a private corporation called the Public Company Accounting Oversight Board that is empowered to set strict standards for corporate accounting.
Accounting Conflicts
The primary impact of this legislation has been to separate accounting practice from corporate consulting. This separation removes any possibility for conflict of interest in the accounting profession. If someone is consulting with a firm on accounting issues as well as doing the actual nuts-and-bolts accounting, opportunity for fraud are endless.
Management
As a result of the new separation in accounting practice, shareholder proxy battles have become easier to win, according to "Forbes" magazine. This means that shareholders have been able to intervene more effectively in management decisions. Putting this more generally, these proxy battles suggest that corporate management has become more vulnerable to shareholder input. More generally, corporate executives are under more scrutiny than ever, making that particular job less interesting to talented managers.
Compliance Costs
Compliance costs have been, by far, the greatest negative impact of Sarbanes-Oxley. These costs have become far higher than first thought as some companies are overcompensating, and even outsource compliance procedures. Audit committees are larger and hold longer meetings, which costs money. Insurance premiums have increased. Audit costs have increased in general, and have become more exacting and onerous. New compliance software has been developed since 2003, which diverts resources and raises costs. At the most extreme, some firms are even going private to avoid the requirements of Sarbanes-Oxley and the PCAOB.
Tighter Restrictions
Accounting has now become more difficult. Even smaller firms specializing in accounting are being audited and inspected every three years, with the larger firms being audited every year. This increase in cost is passed on to the firm that hires them, and thus is passed on to the consumer. Both the accounting firm and the companies they work for are under great scrutiny, making these audit-style jobs more stressful.
Risk
The Sarbanes-Oxley Compliance Journal holds that this legislation has forced many firms to become risk adverse, leading to corporate weakness. Worrying about increased scrutiny for risky measures, many firms have scaled back their operations and focused instead on long-term profits. This might decrease innovation and competitiveness and may turn foreign firms away from American capital markets. On the other hand, with increased controls and greater transparency, many investors and consumers have increased in confidence.
