An Unfair Burden or Economic Darwinism?: The Impact of Sarbanes-Oxley Section 404 on Smaller Public Companies

The crumbling of Enron from within severely damaged investor confidence in US Capital Markets. The Sarbanes-Oxley Act (SOX) tightened the regulation of publicly traded companies in an effort to restore investor confidence. Signed into law in July 2002, SOX motivated both managers and auditors to do more work to ensure that the information contained in financial statements is accurate. As a consequence, managers have to reevaluate their accounting practices before subjecting those practices to the additional scrutiny required by SOX. Specifically, Section 404 of the Sarbanes-Oxley Act (SOX) has required publicly-held companies to incur substantial costs documenting and testing the mechanisms they employ to prevent, detect and correct accounting errors (whether they are intentional or unintentional) before these errors appear in published financial statements.