The Sarbanes-Oxley Act, named for sponsors Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, is the most sweeping law affecting corporations since the 1930s. It is having a dramatic effect on the costs companies pay for independent audits of the financial numbers reported to the outside world. In many cases, companies now pay double historical auditing costs to get auditors to attest that all corporate internal controls have been checked and given their seal of approval. This is a big change for companies that have long accepted internal controls that are less than perfect, and for good reason. A company could eliminate padded travel expenses if it wanted to hire a small army in accounting to verify every taxicab receipt. However, such detailed oversight would often cost much more than direct savings. Critics of traditional failures in corporate governance point out that internal control has an importance beyond that of simply catching the occasional fraud. By going through the effort of complying with Sarbanes-Oxley, many companies are unearthing operating inefficiencies.
A. Critics of Sarbanes-Oxley contend that the act results in excessive compliance costs. Explain why risk-adverse corporate management may be overstating such costs.
B. Supporters of Sarbanes-Oxley argue that the act will produce significant net benefits as corporations improve both the transparency and accuracy of financial reporting. Describe some of the improvements in management efficiency that might be spurred by corporate compliance with Sarbanes-Oxley.