Sarbanes–Oxley Compliance $32 bn bill so far.

Seattle, July, 24.2007 | Sources: Google Feed

The Seattle Post Intelligencer, (July 24, 2007) reports that by the end of 2008, U.S. public companies will have spent $32 bn on compliance with Sarbanes-Oxley (SOX), with more than half of that on outside consulting. Corporate America is racing to the standards set in SOX with Boeing Co. reporting spending more than $165 million in three years on SOX.

In 2006 there were call for Congress to lighten the burden of compliance with SOX. But some firm have reported the implementation of SOX bring benefits benefits especially by its impact on operational risks. Some critics argued that Sarbanes Oxley would damage U.S. competitiveness and that London may take business away from the New York Stock Exchange because its less stringent and expensive listing regulation and corporate laws. This is yet to materialize.

In the wake of recent corporate scandals in America, audit firms came under strong scrutiny and faced calls to clean up their act for the disregard for business ethics. They are emerging as the biggest beneficiaries of SOX compliance requirements. One of the demand of industry observers was the separation of consultancy and audit which would be that audit should not check the accounts of their clients and at the same time advise them on strategic business decisions.

Indeed under SOX, external auditors must certify the accuracy of the financial statements of publicly traded companies. They must also verify that there companies have adequate controls in place to prevent errors and fraud. Most firms use external consultants to meet these requirements they often hire a second audit firm to help them wade through the complexities of regulatory compliance. This can lead to a situation where Audit firm purely and simply swap roles from one client to another which in turn raises question about conflicts of interest.

One of the causes of this situation is the concentration of the audit business amongst the so called Big 4. In the late 1980s audit firms began to merge. The first such merger in 1987 between Peat Marwick Mitchell and KMG Main Hurdman an affiliate of the European firm, Klynveld Main Goerdeler, resulted in the creation of KPMG Peat Marwick. KPMG instantly became the largest accounting firm worldwide with an extensive network in Europe. In 1989, Ernst & Whinney and Arthur Young formed Ernst & Young. In August 1989, Deloitte Haskins & Sells and Touche Ross merged to form Deloitte & Touche. In 1997, four firms proposed additional mergers. The first two were Price Waterhouse and Coopers & Lybrand. Finally in 1998, Price Waterhouse merged with Coopers & Lybrand to become the largest accountancy firms in the world, PricewaterhouseCoopers (PWC). The collapse of Andersen following the Enron scandal did not change this concentration instead there was a mass exodus of Andersen partners and staff as well as clients to the Big 4. Andersen was dissolved in 2002.

The Big 4 firms argue that globalization has been the driving force behind the mergers of the 1980s and 1990s. They also content that their clients need economies of scale and want industry specific and technical expertise to which they have to respond.

It may be too early to infer that the same risks that brought about Sarbanes Oxley has reemerged be it in a very legitimate business relations. Audit firms have done more than any other section of the financial industry to comply with the post Enron legal requirements, Most have sold off their consultancy businesses. However there is a fundamental structural problem in the way audit firms operate and the expectations that legislators, the investing public and the audit clients themselves place on them. These structural problems were not addressed in the new law.