The Shareholder View of Sarbanes-Oxley

The Sarbanes-Oxley (SOX) Act of 2002 and the scandals that precipitated it have had a profound effect on the accounting world. How have those effects been perceived outside the realm of accounting and what, if any, effect has SOX had on the average individual investor?

Who is the average individual investor? According to the Voice of the American Shareholder survey conducted by Harris Interactive for BetterInvesting, they are 49.4 year-old married white men living in the South with less than $100,000 in investable assets but who consider themselves somewhat knowledgeable about investing. They are in the market for the long term although the NAIC Investor Confidence Index has fallen to +5.0 which is it’s lowest level since January 2004.

Most view the boards of directors of public companies as being only “somewhat effective” or “not effective at all” in their leadership. Analysts and observers often ascribe this lack of confidence to the lingering effects of highly publicized corporate scandals, pointing out that once public confidence is lost, it is difficult to win back especially as many past and current scandals continue to make news. Another potential challenge to rebuilding public confidence is the restating of or delay in issuing of financial data, which seems to be increasingly common. Nor does it help confidence that these delays and restatements are being blamed on regulations and guidance intended to increase the accuracy and reliability of the financial data in the first place.

Indeed, Better Investing magazine reports that while most investors believe SOX was created in the best interests of both investors and public companies, 85 percent say their level of confidence in company reports has stayed the same or even declined since SOX went into effect. More significantly, 63 percent of investors say the rules are still too lenient, even as they recognize increased regulation and oversight ultimately hurts investors by driving up the costs of doing business. Audit Analytics reports that SOX has already caused auditing costs to increase an average of 40 percent or $13 million dollars among the nation’s largest publicly-held corporations.

Investors do feel SOX will board members and executives will take their jobs more seriously. They will approach their jobs differently and do more research into the companies they serve. Further, despite rising complaints from chief financial officers who have experienced some of the most dramatic changes in their job descriptions and corporate accountability, 64 percent of shareholders don’t think SOX or scandals will discourage qualified individuals from seeking executive positions or appointments to corporate boards.

The average individual investor’s view of SOX seems to be “we haven’t seen much effect yet, but we hope to see some soon.”


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