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May 17, 2005

Sarbanes-Oxley: The Accountants Aren't Helping

From the Wall Street Journal (page C3 in the print edition):

Regulators issued a rebuke to accounting firms, saying their interpretation of a controversial Sarbanes-Oxley rule had been too strict and resulted in unnecessary costs for some public companies.

The Securities and Exchange Commission and the Public Company Accounting Oversight Board urged accountants to be more flexible in their approach to a rule requiring that companies assess their internal controls over financial reporting. Regulators said auditors had become "overly cautious" and "mechanical" and needed to exercise judgment when interpreting the rule.

The guidance comes in response to growing complaints from businesses about the cost of complying with the regulation, which requires that companies assess their internal controls to ensure their financial reporting is accurate and reliable...

Executives have complained about the rule, saying auditors are performing massive reviews that aren't tailored to a company's size or specific risks. They complain auditors are driving up costs by looking at things that have no bearing on the accuracy of a company's financial statements.

Studies have estimated the cost to companies at about $3 million a year. Some companies have said they have stopped hiring and are considering moving work overseas to deal with the costs.

I continue to think this is a much under-appreciated story.

UPDATE:  A few days old, but here is a related post from Brad DeLong.

UPDATE II: The SEC report is here.

May 17, 2005 in Sarbanes-Oxley | Permalink


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This is what the Big 4 does - take a principled regulation, distort it so it has no real meaning, but make sure it creates large fees for the partners. Sort of reminds me of how the arm's length standard of section 482 (tax code) has lost its simple economic meaning and turned into a regulatory piece of nonsense.

Posted by: pgl | May 17, 2005 at 09:38 AM

This what people do when the government is menacing them. Doctors practice not to get sued when the inevitable, non-perfect, therapy occurs. Now we've got pre-emptive accounting.

Posted by: Patrick R. Sullivan | May 17, 2005 at 03:47 PM

there's no question that businesses are scared out of their minds because of these regulations. It's silly to blame the auditors with the Spitzer-spectre looming around. If the auditor is too lenient, then who gets busted?

Posted by: mike | May 17, 2005 at 04:25 PM

Patrick - if this were being driven by the CEOs and CFOs, I'd agree. Alas, it's being driven by rent seeking Big Four Public Accounting firms who have taken their own failures and turned them into another cottage industry. Maybe it's time for Grant Thornton and BDO Seidman to compete for market share with this Oligopoly!

Posted by: pgl | May 17, 2005 at 07:15 PM

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