Does Sarbanes-Oxley unfairly burden small business?


Instinctively, something that causes disproportionate difficulty or advantage relative to others, contributes to a sense of unfairness.  A survey exclusively of increased burdens on smaller organizations may reveal such areas for concern.  First, in analyzing Section 404 compliance costs, the ratio of these costs to revenues for small business are 750% higher than the same proportion of costs for companies with more than $5 billion in revenue paying an average of $8 million for the same compliance with Section 404 (Canada, Kuhn, & Sutton 2008).

Another study found, “small companies have access to fewer financial resources and have less well-developed financial reporting and control infrastructures to cost-efficiently support the requirements of Section 404” (Nondorf, Singer, & You, 2012, p. 98). “In examining Section 404, it is hard to determine whether the economic benefit of improved accrual quality for a handful of small companies would be enough to commensurate with the substantial compliance cost that Corporate America has to pay” (Singer & You, 2011, p. 559). Most notably, “after the passage of SOX and especially for small companies, was the cost of being public which went from $900,000 to $1,954,000. This increase stemmed from, among other factors, more expensive audits, increased premiums for officers’ and directors’ insurance, and
higher fees paid to outside directors ” (Woo, 2011, p. 152).

One study concludes, “that the decline in operating cash flows is more severe for (i) smaller firms, (ii) low-growth-opportunity firms, and (iii) firms with more complex operations,” in the post-SOX period from 2004-2007 (Ahmed et al., 2010, p. 353).  Not only are small business financials adversely impacted, but staffing concerns are a major concern.  “For example, Peter Bible, Chief Accounting Officer at General Motors Corp states: “The real cost isn’t the incremental dollars, it is having people that should be focused on the business focused instead on complying with the details of rules”” (Ahmed et al., 2010, p. 353).   “To the extent that SOX requirements divert managers’ attention from normal job responsibilities, they reduce overall profitability” (Ahmed et al., 2010, p. 354).

Not only is manager focus diverted more toward compliance efforts, but companies experienced increased “outlays for new senior staff positions such as Chief Compliance Officer and for additional rank-and-file employees needed to comply with the increased requirements” (Ahmed et al., 2010, p. 354).  “Indeed, there is evidence that compliance costs are a significant factor in the decision of smaller publicly traded companies choosing to go private (Block, 2004; Friedlander, 2005; Gibeaut, 2005; Gifford and Howe, 2004; Matherly et al., 2005; Mount, 2005).  This research suggests that SOX has been detrimental to small public companies” (DiGabriele, 2008, p. 1106).

“SOX increased real-time disclosures and shortened reporting deadlines for filing forms 8-K, 10-Q, and 10-K; these filing demands likely increased accounting department personnel”  (Ahmed et al., 2010, p. 354).  In analyzing Section 203 and 207 pertaining to audit-partner rotation, there are again disproportionately higher costs to small business.   The audit-rotation concept increases costs, and, ‘‘Unfortunately, for small firms… the concept ignores the efficiency involved in changing firms from both the client and firm perspective” (Orin, 2008, p. 159).  “In the United States, smaller firms were more likely to go private after SOX; there was a relative increase in the likelihood of small U.S. firms going private by being bought by a private acquirer rather than a public acquirer” (Woo, 2011, p. 153).

“In addition to direct compliance costs, it is likely that both the probability and costs of failing the Section 404 assessments are higher for smaller firms, which can be substantial” (Nondorf, Singer, & You, 2012, p. 98).  So not only is compliance more difficult, but penalties are more disproportionally impactful to smaller firms for failing SOX standards.  “[O]f potential interest to regulators, legislators, and others who are concerned with the disproportionate impact of the Sarbanes-Oxley Act, we also find that SOX was most costly for small firms” (Ahmed et al., 2010, p. 366).  “Lastly, Gao et al. (2009) show that compliance costs have such negative consequences on firms that they prefer to forgo growth opportunities in order to remain small, and avoid the compliance costs” (Nondorf, Singer, & You, 2012, p. 100).  A sampling of quantifiable studies suggests that SOX may be placing some disproportionate burdens on smaller firms with adverse consequences more easily accommodated by larger corporations.


Ahmed, A. S., McAnally, M. L., Rasmussen, S., & Weaver, C. D. (2010). How costly is the
Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability.
     Journal of Corporate Finance, 16, 352-369.

Canada, J., Kuhn, J.R., & Sutton, S.G., (2008). Accidentally in the public interest: The perfect
storm that yielded the Sarbanes-Oxley act. Critical Perspectives on Accounting, 19, 987–

DiGabriele, J.A. (2008). The Sarbanes-Oxley Act and the private company discount: An
empirical investigation.  Critical Perspectives on Accounting, 19, 1105–1121.

Nondorf, M. E., Singer, Z., & You, H. (2012). A study of firms surrounding the threshold of
Sarbanes–Oxley Section 404 Compliance. Advances in Accounting, incorporating
     Advances in International Accounting, 28, 96–110.

Singer, Z. & You, H. (2011). The Effect of Section 404 of the Sarbanes-Oxley Act on Earnings
Quality.  Journal of Accounting, Auditing & Finance, 26(3), 556–589.

Woo, C. H. (2011). United States Securities Regulation and Foreign Private Issuers: Lessons
from the Sarbanes-Oxley Act. American Business Law Journal, 48(1), 119-176.