Investors See SOX Regulations Lacking

A new poll Wall Street Journal Online / Harris Interactive Personal Finance Poll shows that 55 percent of the participating adult investors believe the current financial and accounting regulations governing publicly held companies are too soft. Harris Interactive reports that for male investors aged 45 to 54, this number rose to 77 percent. The online poll gauging the effectiveness of the Sarbanes-Oxley Act of 2002 (SOX) was conducted jointly by Wall Street Journal Online and Harris Interactive Personal Finance.

Almost in contradiction, a majority of investors participating in the poll believed that penalties for poor corporate governance should be directed toward specific executives or other guilty individuals in an errant organization instead of the company itself. Also Harris Interactive reports that 30 percent of those responding said that they have divested or reduced their shares in a company as a result of their poor governance. Given their knowledge of the provisions, restrictions, and penalties of SOX, more results follow.

  • 25 percent believe that communication of financial information by companies is much more or somewhat more transparent.

  • 11 percent believe that SOX has had the opposite effect, making communication of this information much less or somewhat less transparent.

  • 41 percent of those polled were unsure of SOX and the impact of SOX on corporate communication transparency, suggesting these investors have a very limited understanding of the Act and its corporate impacts.


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Anne Aldrich, senior vice president of the Financial Services Research Practice at Harris Interactive® said speaking in Yahoo Finance, “The effect of Sarbanes-Oxley seems to have blown by the average investor. More concerning, among those who are attuned to the legislation, one-tenth believes that communication has become even less transparent with Sarbanes-Oxley in effect. Even as corporate scandals have waned and other economic news on energy prices and natural disasters has taken over the airwaves, organizations will need to continue to find ways to build trust in public companies among the investing population.”

With all the financial information available to investors, situations still occur that could have been avoided. A current example is the collapse of the futures brokerage firm, Refco Inc. There were blatant clues to the financial health of the company in the company’s initial public offering (IPO) prospectus. The words “significant deficiencies” should have aroused interest to even the most professional of investors but did not as big money was poured into the company’s stock during its August 11 IPO and thereafter until financial fraud shattered the company about two month later.

Grant Thornton was the company’s auditor and cited non-compliance problems in the preparation of their financials and quarter closing procedures in its initial SEC filing according to the Charlotte Observer. The rub for Grant Thornton may be that the prospectus did not contain their opinion as required by Sox Section 404. Nevertheless the company stated that it would be SOX compliant by February 2007.

Investors sank $583 million into the Refco IPO and the offering price of $22 a share rose as high as $30 in the coming weeks until October 10 according to the Charlotte Observer. The company announced that the CEO kept a debt of $430 million off the corporate books. Although the CEO Phillip Bennett was ousted and charged with securities fraud, Refco shares trade under their former highs. The company’s hot stock although still trading, has turned cold.

The International Herald Tribune reports that the company has since filed for bankruptcy protection. Professional and non-professional investors had access to all the information that eventually caused the demise of Refco. Investors may think SOX compliancy is redundant but may be important nevertheless.

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