Question

what is the major drawback of the SOX act?

Answer 1

There are four major drawbacks of SOX act -

1. It is costly
One of the biggest criticisms of SOX is that the rules are the same for both large multi-national companies and small public companies. In particular, Section 404 hits publicly funded corporations harder as they need to have the resources in place to execute what the section demands.

2. It results in increased audit fees
Since 2002, audit fees have increases substantially as a result of auditors being forced to be more accountable for the audit reports on their clients. As the liability of auditors increase, so does the audit fee. These added expenses can take a toll on the profit of a company.

3. Increased Personnel

An important function of SOX guidelines is the segregation of accounting duties. This ensures that one individual does not handle certain accounting processes from start to finish, which may increase the chances of fraud or embezzlement. In order to meet the segregation of duties requirement, companies must add additional accounting personnel. Using current employees outside the accounting office is not acceptable because it breaks down the internal controls function.

4. Tougher Penalties

Penalties for accounting fraud and embezzlement were increased under the new SOX guidelines. Unfortunately, some penalties enacted focused on minimal violations, such as not signing financial statements or issuing statements to the public stating that executive management has approved of any financial information released by the company. Strict penalties on such minor infractions may limit the executive talent pool if future management employees do not wish to be liable for such actions and penalties.