Sarbanes-Oxley Act Of 2002 - SOX

Categories: Regulations, Investing

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.

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Finance: What is Sarbanes Oxley?1 Views

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Finance Allah Shmoop What is Sarbanes Oxley socks Well It

00:09

was a moment in time when it seemed that nearly

00:12

every major company was riddled with lies Deceit and chicken

00:16

hree fake accounting off balance sheet tricks outright fraud There

00:21

was WorldCom and in Iran and Cendant and Lucy's psychiatry

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stand All right In two thousand two It was as

00:28

if every morning greeted Wall Street Journal readers with a

00:31

new onslaught of how America was really a corrupt angry

00:34

tricky Dicky society of financial bed Weathers And in fact

00:38

it turns out well yes there were a few really

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bad weather's but his things usually do overtime Karma spoken

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The bad actors were jailed and found and stamped out

00:47

like mice who accidentally wandered into an elephant sanctuary happens

00:52

And in the ashes of all of those bad land

00:54

discoveries came a new set of laws revolving around how

00:56

proper accounting in disclosure should work And the leader of

00:59

that pack was socks or Sarbanes Oxley The act which

01:03

stipulated ah whole raft of procedures that companies had to

01:06

follow in filing public accounting documents The lion share of

01:09

those docks comprise the ten K annual and the ten

01:12

Q Quarterly's which went from being a twenty pages long

01:15

to something like sixty seventy eighty pages It was the

01:18

greatest boon for CPS everywhere as the need for re

01:22

ALOF deters nearly doubled overnight tons of little things had

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to be checked confirmed and turn your head and cough

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by outside parties The CEO's trip to Hawaii was that

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really unnecessary business trip Did he really need to take

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his mistress with him to take dictation The four hundred

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dollars for surfing lessons A business expense Really Well if

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he was the CEO of Oakley sunglasses and maybe you

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could make that argument But his head of a sea

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Delko sellers of windshield wipers and not so much in

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fact socks found enormous volumes of little fraud rampant across

01:56

many many filings and in amazingly short periods of time

02:00

was really just a few years Most of those smaller

02:03

fraudulent corporate leakages were cleaned up with haste and to

02:07

the bane of ambulance chasing lawyers who were used to

02:09

getting rich off of suing companies for fraud Well the

02:12

downside of socks was that it was blanket form meaning

02:15

that it treated General Electric the same way it treated

02:19

etc Tiny company's doing only a fifty million dollars in

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revenue We're required to make the same detailed filings as

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behemoth company's Doing desa billions in revenue is that behemoth

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could advertise that fifty million dollars in audit expense across

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an enormous base The tiny companies could not sew socks

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Compliance costs became a meaningful expense too Small companies that

02:40

had precious few resource is to apply to growth so

02:44

subsequent to Sarbanes Actually a number of amendments were made

02:46

that allowed for small companies to quote file light Basically

02:50

the level of detail required in cross checking was minimized

02:53

and a kind of tiered structure began to be applied

02:56

to companies of different scale and scope Such that the

02:59

increased government scrutiny on accounting practices and the legalities of

03:03

transactions was not in fact heavy friction to the normal

03:06

highly competitive business practices living out there on the horizon

03:10

So Sarbanes Oxley exist today in all its living glory

03:13

producing second and third homes for partners in large aqui

03:16

accounting firms everywhere giving them plenty of spaces Teo you

03:20

know wet the bed

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