In 2002, Congress passed the Sarbanes-Oxley Act (SOX) after a wave of corporate misdeeds, such as the Enron scandal. The essential purpose of this law is pure; to provide stricter laws surrounding corporate governance and to increase investor confidence. However, over the years the laws have shown to have many adverse effects, especially on smaller firms.
Because SOX increased regulation, it increased the costs the firms must cover for being audited. This summer, I experienced this first-hand as I assisted with many types of SOX testing in community banks and relatively small IT firms. One day, I was asked to review all of the contracts between the clients and my firm. After reviewing the financial terms, I can certainly imagine how much of a burden these audits were to the clients. Additionally, my firm was not making large margins on the tests.
Well-established scholars, such as members of the RAND CORPORATION, have supported my circumstantial evidence. In the book In the name of entrepreneurship? The logic and effects of special regulatory treatment for small business, researchers at RAND discuss the effects on Sarbanes-Oxley on small businesses through empirical data. They found that SOX generally has a negative effect on small firms by decreasing the availability for capital because of such large regulatory hurdles.
In my white paper, I would ultimately like to discuss ways to improve the Sarbanes-Oxley laws in order to encourage growth between small and medium publically held corporations. To do this, I will first discuss the reasons for the Sarbanes-Oxley laws and the known effects during the 10 years of their existence. Next I will weigh the positive and negative aspects of the law. I will end by suggesting improvements to the laws in order to encourage growth of small businesses in the American economy.