Sarbanes-Oxley Act Of 2002 - SOX

It was a moment in time when it seemed that nearly every major company was riddled with lies, deceit, and chicanery. Fake accounting. Off balance sheet tricks. Outright fraud. Worldcom. Enron. Cendant. Lucy’s Psychiatry Stand. In 2002, it was as if every morning greeted WSJ readers with a new onslaught of how America was really a corrupt, angry, tricky-dicky society of financial bedwetters. And in fact, it turns out that...there were a few really bad wetters.

But, as usually happens over time, karma spoke, and the bad actors were jailed and found and stamped out like mice who accidentally wandered into an elephant sanctuary. And in the ashes of all of those badlands discoveries came a new set of laws revolving around how proper accounting and disclosure should work. And the leader of that pack was SOX, or Sarbanes-Oxley Act, which stipulated a whole raft of procedures that companies had to follow when filing public accounting documents.

The lion’s share of those documents comprised the 10K annual and the 10Q quarterlies, which went from being 20 pages long to something like triple that amount. It was the greatest boon for CPAs everywhere, as the need for real auditors nearly doubled overnight. Tons of little things had to be checked and confirmed by outside parties. The CEO’s trip to Hawaii. Was that really a necessary business trip? Did he really need to take his mistress with him, to take, um…dictation? The $400 for surfing lessons...a biz expense? Well, if he was the CEO of Oakley sunglasses, maybe you could make that argument. But as head of AC Delco windshield wipers, not so much.

In fact, SOX found enormous volumes of little fraud rampant across many filings, and in an amazingly short period of a few years, most of those smaller, fraudulent corporate leakages were cleaned up with haste, and to the disappointment of ambulance-chasing lawyers who were used to getting rich off of suing companies for fraud.

The downside of SOX was that it was blanket form. Meaning that it treated General Electric the same way it treated Etsy. Tiny companies doing only tens of millions in revenue were required to make the same detailed filings as behemoth companies doing deci-billions in revenues. The behemoths could amortize the $50M in audit expense across an enormous base. The tiny companies could not, so SOX compliance costs became a meaningful expense to small companies that had precious few resources to apply to growth.

So subsequent to Sarbanes-Oxley, a number of amendments were made that allowed for small companies to “file light.” Basically, the level of detail required in cross-checking was minimized, and a kind of tiered structure began to be applied to companies of different scale and scope, such that the increased government scrutiny on accounting practices, and legalities of transactions, were not, in fact, heavy friction to the normal, highly competitive business practices living out there on the horizon.

Sarbanes-Oxley exists today in all its living glory, producing second and third homes for partners in large accounting firms everywhere. Giving them plenty of places to, uh…wet the bed.