I will start this one with my standard discalaimer whenever I review a paper that is based on a survey data: be forewarned, survey data is often notoroiously inaccurate and biased. Thus, view the folloiwng with a good deal of skepticism.
The warning given, the paper itself is intersting. Peng, Dukes, and Bremer survey 1,312 CFOs who were in the Financial Executives International (FEI) database as of May 24th, 2005. Of course, the vast majority did not reply, but they did get 83 responses (6%).
So remembering the above disclaimer, How did the CFOs respond? Prett much as expected, they hate it! (which is exactly what I hear every time I speak with any of the CFOs I know.)
From the paper:
"...the approximate annual average cost of compliance to a company in our sample is estimated to be $1.77 million....More than 50% of the CFOs in our sample report that the cost estimate of compliance with the Act is between $500,000 and $3 million."About 60% say that the costs of complainace outweigh the benefits.
Other interesting findings:
* "unlike Linck, Netter, and Yang (2005), we find that there is not any significant change in the following aspects of corporate governance practices due to the enactment of the Act since July 2002:"There were some before/after differences however.
The paper reports that more firms are using independent audit committees and have more financial experts on the committee since teh adoption of the law. Moreover, more firms have adopted a code of ethics (80 of 83 repsonders said they do now, where only 57 did prior to SOX).
* The act has created jobs for accounting professionals: "The average number of staff that companies in our sample have to hire to deal with Section 404 compliance is 3.61 with the median value of five. The extreme cases are that two firms have to hire an additional 25 employees for Section 404 compliance."
What may be the most interesting however are the comments the authors received from CFOs. I will quote one to whet your appetite:
"“This Act was horribly overreaching. It is costly, and there is very little/absolutely no cost benefit relationship. The Act and, specifically, the Section 404 requirements, will do little, if anything, to deter the "crimes"/"irregularities" it was intended to deter/preclude. Management override is the biggest issue, and the Section 404 requirements hardly address that issue. It is a complete waste of time and money. PCAOB is ineffective, at best. Their "investigations" of the Big 4 firms is a joke, and the Big 4 firms don't know what to do or how to do it in complying with the Section 404 audits. They (the Big 4 firms) gouged "corporate America" in the purported "audits" of the control environments, using no/very little professional judgment in the conduct of their examinations. And I spent over 30 years with a Big 4 firm, including over 20 as a Partner.”"uh, could you tell us what you really think?
Interesting article. It is still being revised and the authors have asked for comments, so if you have a few minutes, whay not send them your thoughts. And tell them you first saw the article here ;)