The Sarbanes-Oxley Act of 2002, which introduced a set of standards for United States public company boards, their management as well as public accounting firms, has had immense impact on the governance of US companies (Clark, 2005).
Most significant post-SOX governance changes are audit-related: conflict reducing rules, and action-forcing rules. The governance changes have served to discourage, eliminate or reduce relationships that tempt, force, or lure external auditors into not playing their role as diligent judgmental observers of their corporate clients. As such, auditors and their clients have increasingly avoided acting as reciprocating friends who push their own agendas at the expense of public investors (Clark, 2005). For instance, management of public corporations are forbidden from seeking the help of external auditors in adopting financial information systems, and other services such as bookkeeping, appraisal, valuation, actuarial, internal audit, investment banking, legal services, management functions, and human resources services.
The Act has also placed a requirement on companies to disclose the size (i.e. the cost) of audit and audit-related services compared to permitted non-audit services. Such disclosure has allowed investors to better estimate the extent the external auditor may still be compromised by a given conflicting interest (Clark, 2005).
In terms of action-inducing rules, public companies are now obliged to have in place a functional system of internal controls, and management is required to make disclosures and attestations regarding the internal controls. The impact has been companies devoting great amount of resources to document their processes more completely together with making significant improvements to the security of and access of their financial information systems (Clark, 2005). Audit committees has devoted much time and energy to monitor the implementation of the new controls and the mandatory process of adjusting to section 404 attestations, which has helped many CEOs to improve their respective management information systems.
The changes brought about by the SOX Act have proved rather costly in terms of money to many companies in the U.S. Section 404 has imposed large new fees, there are higher regular audit fees, and increased expenses on some non-audit consulting services. The PCAOB has costs that are moderately significant with a huge positive effect on the corporate system (Clark, 2005).
Reference:
Clark, C., R. (2005). Corporate Governance Changes In the Wake of the Sarbanes-Oxley Act: A Morality Tale for Policymakers Too. Retrieved from: http://www.law.harvard.edu/programs/olin_center/papers/pdf/Clark_525.pdf.
