Throughout the 20th century has witnessed both the enormous economic growth of international companies as well as recurring periods of corporate misconduct and fraud. Time and time again, the public turns to the government to solve the economic consequences of corporate unethical behavior through series of financial regulations, but yet corporate fraud continues to recur.

The Sarbanes-Oxley Act of 2002 was implemented in response to the string of corporate scandals and bankruptcies that marked the early 2000s. The Act was said to be the most comprehensive and important corporate governance reform since Franklin Delano Roosevelt was in office. Aimed at eliminating corporate fraud and restoring investor confidence, SOX set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. Provisions range from additional corporate board responsibilities to criminal penalties, and require the Securities Exchange Commission (SEC) to implement rulings on requirements to comply with the law.

Although SOX has been generally effective in restoring investor confidence and enforcing internal controls, the positive reforms have been overshadowed by Section 404, which imposes high costs with little returns in terms of fraud prevention. Section 404 applies a one-size-fits all fixed cost on all publicly listed companies, resulting in disproportionate burdens on smaller companies. The costs themselves were grossly underestimated by Congress, and have led to small companies deciding to go private, and deterring foreign companies from listing on U.S. Securities Markets. These developments have not only hurt the companies being regulated, but has hindered the capital markets overall and reduced investment opportunities.

Understanding the detrimental impact that SOX implementation had on smaller companies, on December 16, 2004, the SEC announced the creation of an advisory panel to evaluate the act’s impact on smaller public companies. The 2007-2009 economic recession again created public pressure on Congress to respond with new financial regulations, and in July 2010 it passed the Dodd-Frank Act, which, in addition to various financial reforms, included a provision that implemented permanent exemption from part of SOX Section 404 for smaller companies.   

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