The Impact of Sarbanes-Oxley Act - Term Paper Example

The Impact of the Sarbanes-Oxley Act Introduction In the wake of the financial scandals by US companies that rocked the business world in 2001, the Public Company Accounting Reform and Investor Protection Act also known as the Sarbanes-Oxley Act of 2002 or SOX was instituted. The Act’s main objective was to restore investor confidence as large corporations were exposed as having been operating using fraudulent accounting methods to skim profits or hide bad losses within their businesses as well as institute measures aimed at curbing a recurrence of such abuses. Some of the large firms associated with falsified accounting activities include Enron, WorldCom, HealthSouth, Adelphia, and GlobalCrossing among others. Background The Sarbanes-Oxley Act was the consequential integration of two parallel financial reform bills advanced by Sen. Paul Sarbanes of Maryland and Rep. Michael Oxley of Ohio that correspondingly aimed at curbing the accounting practice accesses witnessed by large corporations in the US and internationally. Rep. Oxley bill was considered modestly pro-business with non- stringent regulations however Sen. Sarbanes was more substantial in its reform agenda and may not have sailed through at other times but the ensuing WorldCom scandal tilted public opinion heavily against corporate executives thus was passed 97-0 in Congress (Murray, 2002); (Hilzenrath et al, 2002). At the signing of the act in July 2002, President Bush proclaimed it as the most momentous legislation with “the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt.” (Whitehouse.gov, 2002). The Securities Acts of 1933 and 1934 initiated by President FDR were also critical at that time in regulating the stock exchange and restoring investor confidence after the Great Depression plummeting of stocks that can be likened to the current global financial crisis. Transparency and Responsibility Although the Sarbanes-Oxley Act of 2002 heralded a new era of transparency and responsibility for accounts reporting, it was also the harbinger for escalated expenditure, confusion and antipathy by corporate executives as the guidelines necessitated costly outlays and less flexibility and financial dexterity (Bisoux, 2005). Nonetheless, Bisoux (2005) asserts that SOX has forced many corporate executives to abandon the “what-you-don’t-know-can’t-hurt-you approach at managerial levels to an honesty-is-the-best-policy” (p. 25). The SOX Act deliberately intended curbing recurrent deceptive accounting practices thus asserting its objectives to, “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws” (Sarbanes-Oxley, 2009). Organisations have now been compelled to have a financial expert within their audit committees while similarly requiring them to add an ‘internal control report’ to their annual financial statement itemising the measures the company’s management has taken to establish internal controls in addition to their assessment of their effectiveness in regards to the SEC/SOX guidelines (Gallegos, 2003). SOX makes it mandatory for company’s CEOs and CFOs to be held personally liable for all the financial statements issued by the firm under their watch hence must certify or vouch for their authenticity. With eleven titles and sections, the Act imposes tough guidelines and responsibilities on a company’s board thus making it a criminal offense to violate these rules (Bisoux, 2005). These obligations on the board and management are set out in two main sections of the Act: Section 302 (Corporate Responsibility) – that requires the company’s management to disclose:- All the pertinent material information to the SEC Notify the SEC if any changes to appropriate disclosure controls have been altered Notify the SEC of changes in internal financial reporting Notify the SEC of the existing or identified limitation or paucity including fraudulent activities in the firm Section 404 (Management Assessment of Internal Control) – requires the firm’s management to gauge internal controls effectiveness as necessitated by the act. The publicly listed firms must authenticate their financial reporting systems are up to the required standards thus adequately identifying revenue in addition to setting up internal controls to stem any possibility of fraud (Bisoux, 2005). Section 4 also has provisions that prohibit company boards and executives from taking out internal loans (Bergen, 2005) [see illustration Figure:1]. Figure 1: The Sarbanes-Oxley Act Section 404’s Financial Sphere of Influence Source: Mayer (2005, Pg. 8 Failure to comply with act may lead to hefty fines for the CEO and CFO including a $5 million penalty or 20 years sentence in case they are found to have deliberately deceived shareholders and the authorities or disregarded their oversight duties (Financial Executives International, 2007). PCAOB and SEC Duties over SOX The Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) have however attempted to ease the passage or entry of smaller firms into the act through a raft of measures that cushion the impact of Section 404 particularly. Subsequently, SEC urged the Committee of Sponsoring Organizations of the Treadway Commission (COSO), to set less stringent rules for the smaller companies, which will eventually allow them comply using inexpensive financial reporting systems (GAO, 2006). PCAOB, a nongovernmental non-profit organisation set up through the provision of SOX has been tasked with overseeing that public companies comply with the act while also reporting to the SEC. Its duties therefore encompass “auditing, quality control, ethics, and auditor independence standards.” (GAO, 2006, p. 1). [See summary Figure: 1] The PCAOB is also mandated with providing conflict resolutions between the audit firms and company’s management, establishing a forum for whistle-blowers and other complainants (Section 806), and generally setting up appropriate standards for auditing firms. For those audit firms that have more than 100 client firms, an annual quality review will be conducted by the PCAOB as a means of establishing whether there is any compromise in quality as opposed to quantity (Zietsman, 2004). Figure 2 Benefits of SOX Compliance Companies that implement the guidelines may reap benefits that include a more streamlined operation which ensures that the firm’s strategic projects and accounting reporting are closely interlinked thus making the management issue timely decisions backed by sound financial records (Bergen, 2005). The setting up of contemporary innovative accounting systems frees up key staff from the drudgery and time consuming accounting reporting to other critical duties within the firm while ensuring a faultless synchronization of the firm projects (Zhang, 2005); (Mayer R. T., 2005). The long-term cost efficiency that ensures due to less time wasted in non-productive accounting reports impacts positively on the firm. Companies will therefore ultimately realise less expenditure in bureaucratic formalities as result of more efficient reporting systems (Zietsman, 2004). Customers and suppliers also prefer to deal with firms that have complied to the act since they are more efficient and transparent as opposed to the heavy bureaucracy in the conventional firms that still operate the old systems (Zhang, 2005). Companies ultimately will be able to streamline their operations efficiency as they detect existing weaknesses that may have been hindering their operations (Byrum, 2004). This will enhance the firms operational features ensuring all departments and systems work concurrently and efficiently thus leading to well coordinated functions that add value to the firm and improve production competence (KPMG, 2004). The main benefit associated with the act is the improvement of internal controls and competence as workers and management are forced to streamline their functions in line with SOX and improving accounting reporting systems (Byrum, 2004). Corporate employees in whichever field or department are therefore required to be more transparent in their dealings as the SOX rules necessitate strict observance of accounting reporting (FEI, 2007). All the workers from the bottom to top have to be keenly aware of the statues of the act and reporting guidelines hence, business leaders need some basic accounting knowledge to grasp the necessary reforms as mandated by Section 404 of SOX (SEC, 2009). CRITICISMS OF THE ACT Expenditure The act has however being negatively received by most executives in the business community who perceive it as an overt political manoeuvre influenced by cynical public mistrust of the corporate world hence leading to the punitive SOX act that has far reaching cost implications on the firms. Consequently a study by the CFO Magazine in 2003 on corporate executives revealed that 70 percent felt the expenditure involved does not validate the expected benefits while another survey by Financial Executives International (FEI) in 2004 indicated that the additional costs appreciated the auditing fees by 53 percent (Zhang, 2005). A SEC (2009) study has concurred with the findings; citing compliance expenditure was subject to firm size and conformity record thus reducing with continued compliance experience and compliance administration, which reduced expenditure after the 2007 SEC reforms. The SEC survey also confirmed that larger corporations though having heavier outlays in terms of absolute costs actually incur less expenditure in relative terms or scaled costs in addition to the initial start-up costs (SEC, 2009). Impact on Small Firms The impact of the Sarbanes-Oxley Act of 2002 on small firms has been profound as many are hampered by the expense involved in fully applying the rules particularly Section 404 on internal controls. According to a study by the Financial Executives Institute (FEI), the maximum expenditure for each dollar of revenue that is incurred by firms with returns not exceeding $100 million or 3.57 percent of their revenue (Financial Executives Institute, 2007). The cost implication for setting up the required systems and audit fees has therefore been found to be rather punitive for the smaller firms (Michelson et al, 2009). FOREIGN COMPANIES AND SOX COMPLIANCE The Sox Act was initially targeted at US companies and their international concerns but has since 2005 been imposed on all overseas firms that enlist in the US stock exchanges. Additionally European firms operating in the US also have to comply to the the International Financial Reporting Standard (IFRS), which is an equivalent international accounting standard. Concerns of EU Countries There have been concerns that foreign public listed firms are finding it more difficult to register in the US bourses due to the high fees and recent stringent SOX directives that seem to have escalated the entry fees even further. This phenomenon has been acerbated by the easing of EU entry rules as the European Commission integrated thus serving as an alternative market for overseas firms (Woo, 2003). There have been concerns over the legality of some of the SOX directives that contradict or run counter to foreign laws including Section 302 requiring a CEO responsible for all transactions while in Europe, particularly Germany, all the company’s board members have an equal responsibility. In Section 304, contractual commitments in foreign markets can be deemed by the overseas edicts as superior to US rules due to their precedent nature hence exposing the issuer to further claims. Section 301 also contradicts civil law countries rules like Germany, which mandates a two-tier board contrary to SOX’s independent audit committee requirements. The stringent SOX rules and guidelines may therefore substantially inhibit foreign investments in US markets as the many regulations impose extra costs on the overseas firms. In view of these, the SEC has eased some of the controversial rules like Section 301 with some exemptions for foreign firms (Woo, 2003). Most foreign companies nevertheless cross-list in the US exchanges to enhance their standing and prestige within their own domestic markets as well as gaining substantially from the US market open and transparent regimes. This is particularly evident among Japanese and other Asian firms while EU companies seek to explore the potential growth within the US markets including attaining better financial access surmount market segmentation, improved investor support, superior liquidity, and transparency (Doidge et al, 2004). The SOX provisions however provided a challenge to the foreign firms as they are confronted with new strict rules and guidelines that may discourage them from listing in the US markets as the cost benefits outweighs any potential gains envisioned as well as duly providing a conflict of interest with their domestic statutes (Leuz et al, 2004). However, the US Securities and Exchange Commission (SEC) has been actively trying to ease the negative impact on the small firms and foreign firms through issuing of several fresh guidelines. The most significant been the adoption of the 2007 non-binding guidelines issued by SEC addressing their concerns and the more notable Smaller Reporting Company Regulatory Relief and Simplification in 2008 (SEC, 2007); (Federal Register, 2008). Obstacles for Business Start-ups The cost implication for small firms particularly those envisioning going public or launching IPOs are daunted by the need to continuously expend a high proportion of their small budgets on SOX compliance necessities. Small companies use at least one percent of their budget to be on SOX regulatory requirements e.g. a $20 million start-up will need at least $200,000 in accounting outlays to be admitted in the public exchanges (Leuz et al, 2004). Companies Deregistering According to PricewaterhouseCoopers’ Ray Beier, “the pendulum has swung too far” as the act sought to rein in the large rogue corporations; it has conversely negatively affected on the relatively smaller firms unable to cover the costs of adhering to SOX (Bisoux, 2005, p. 29). A Wharton School survey has also revealed that many firms are opting to deregister from public trading as the escalated costs of keeping within the SOX directives override the probable benefits of listing. Companies deregistering have therefore tripled from 2002 to 2003 though some are not motivated by cutting expenditure but rather to avoid the scrutiny by regulatory authorities (Leuz et al., 2004). Some of the firms considering deregistering include Nippon Telegraph & Telephone and LVMH while several others have opted to list elsewhere including Porsche, Daiwa Securities and Benfield Group Ltd the latter opting for enlistment at the London FTSE (Woo, 2003). Cost Implication for SOX Compliance According to Zhang (2005), the ‘cumulative abnormal return’ resulting from the law-making in the run up to the actual passage of the act negatively impacted on firms which can be approximated at $1.4 trillion loss in market value. A study by PricewaterhouseCoopers on corporate CEOs at the World Economic Forum in 2004 revealed that 59 percent find that overregulation of their businesses hampers the expected growth of their firms (Norris, 2004). Apart from the cumulative overall direct and indirect expenditure, the stringent measures imposed by SOX have a detrimental effect on corporate flexibility in business as management is hampered by various rules and guidelines that limit the firms diversifying their ventures hence negatively affecting their returns (Zhang, 2005). In corporate USA, the total expenditure incurred by all firms complying with the SOX guidelines has been set at over $35 billion with most of the costing going into expensive IT systems in addition to the added hours required to implement the systems fully. A survey by Recognition.com in conjunction with CFO.com distinguished the cost implications for large and small firms, with the former or those having over $1 billion in revenue expected to spend over 12 person-years in labour and cumulative auditing expenditure escalated approximately by 52 percent. The smaller midsized firms with revenues of $200 to $1 billion can use up to 6.5 person-years with an increment of external auditing costs rising by 81 percent (Zhang, 2005). Likewise a Financial Executives International (FEI) survey conducted in 2004 indicated an average 62 percent rise in costs from internal expenditures while another survey in 2005 by the same firm found revealed 39 percent rise in external expenditure (FEI, 2007). The Business Roundtable of Washington, D.C in its 2005 third annual survey of its affiliate members indicated that 47 percent expected approximately $10 million additional expenses in SOX compliance costs while a third estimated costs of between six to ten million to set up the act requirements. A study by the Financial Executives International approximated the expenditure by UK firms listed in the NYSE will incur an estimated outlay of £122 million to be SOX compliant. This has forced some international firms listed in the US exchanges to deregister or pull out due to the cost implications of the SOX act. Swedish firm Electrolux deregistered from the NASDAQ to return to its Stockholm base to save costs expected from SOX compliance. Similarly newly established companies are shunning the US market listings thereafter registering in overseas bourses thereby avoiding the SOX compliance issues. AUDITORS ROLE IN CORPORATE SCANDALS Apart from corporate executives, auditors have also been heavily censured for their complicity and negligence in the corporate scandals that rocked the business world in the early part of the millennium. Many analysts have questioned how external auditing firms like the now defunct Arthur Andersen LLP accused of complicity with Enron executives, were unable to detect the extent of the elaborate and huge accounting frauds that went on for many years even with continuous scrutiny allegedly finding their operations as clean. Due to the apparent inability at self-regulation, SOX has designed comprehensive guidelines that auditing firms and corporations must adhere to eliminate such glaring scenarios recurring (Lee, 2003); (Thompson and Lange, 2003). Sarbanes-Oxley Act (SOX) and the Two-Day Reporting Rule Narayanan and Seyhun (2006) argue that a strict enforcement of the two-day reporting rule as set by the Sarbanes-Oxley Act (SOX) can positively affect the post-grant date market-adjusted stock returns as corporate executives are limited in their influence on the results as they normally either back-date the grant date or obscuring the grant date deliberately (Maremont, 2005). Studies have consistently revealed that post-grant-date stock returns are usually positive with further evidence indicating that executives obtain stock options at low prices thus effectively dealing in insider trading (Solomon, 2004); (Lie, 2005). However, unable to sustain their illegal backdating operations, executives have now been delaying the release of the post-grant stock returns in the post-SOX era in efforts to beat the prompt release deadline of two days (Morgenson, 2004). Conflict of Interest and Non-Audit Services Some of the new audit rules enacted by SEC from the SOX requirements necessitate companies seek prior approval from audit committees to engage in non-audit or consultancy services. In other requirements, companies are required to change the regular audit firms every five years while also banning them from engaging in other non-audit services. Former employees of audit firms are required to take a one-year cooling-off period before any possible employment in a firm they had been auditing to avoid any possibility of inside information and conflict of interest. Audit firms are also required to reveal the fees paid by the audited organisations in measures aimed at discerning compromised positions involving the company’s executives. Auditing firms were now subject to strict regulation by the oversight body PCAOB with direct authority over their functions (Lee, 2003). [See figure 2] Figure 3 SOX’s Proscribed Non-Audit Activities for Auditing Firms SARBANES-OXLEY ACT (SOX) AND IT CONTROLS For organisations intent on simultaneously complying with the SOX provisions as well as curbing the ever-rising incidents of local and global cyber-crimes and terrorism, Gallegos (2003) argues that firms must engage the services of competent IT professionals that can establish elaborate systems in both architecture and proficient software able to keep at bay such intrusions. The systems will also assist in adequate reporting and internal systems that compliment other strategic approaches (Singleton, 2003). The need to have highly developed IT systems have benefited the ICT sector as almost all pubic listed companies have to invest heavily in advanced technological systems (Bergen, 2005). IT Controls and Strategic Management Functions Gallegos (2003) asserts that it is imperative for management and internal auditors to ensure both manual and automated are fully functional as strategic company decisions are dependent on data obtained from this systems. The information garnered from the systems not only guides the firm in its strategic management functions but also guides external auditors to sieve through the data and acquiring the necessary accounting data. Gallegos argues that SOX has not only reinforced the independence and professionalism required of auditing firms but also elevated the significance of internal auditors within the company strategic functions. Global trading corporations are required by SOX to set up elaborate supervision for import-export procedures and worldwide supply chains (Byrum, 2004). Likewise, these global operators must regularly post their quarterly and annual financial statements in addition to identifying possible external threats, including terrorist or cyber attacks. International corporations are additionally required to disclose all the off-balance sheet deals, commitments and scheduling (Bergen, 2005). The Sarbanes-Oxley act gives much significance to electronic records with majority of contemporary firms now having 99 percent of their data in electronic form. In Section 802, SOX directives make it a criminal offence to destroy such records hence the need to preserve forensic records properly that may ultimately assist the organisation in averting costly litigation or awards by judicial courts (Mullis, 2009). Companies therefore have to invest in veritable databases that retain forensic records for extensive periods hence meaning some additional expenses will be incurred (Richardson, 2005). Under Section 802 of the Sarbanes-Oxley act, public listed companies must preserve their accounting and other relevant forensic data for a minimum of five years and relay the requisite or relevant rules regarding the preservation of pertinent data from an audit within 180 days (SEC, 2009). Due to the hefty penalty for any purported accidental deletion of data, Mullis (2009) suggest that corporations must invest in advanced ICT systems that not only preserve the records as mandated in SOX directives but also protects the corporation from an employee error. Enhanced information systems have consequently been termed as the cornerstone for an efficient accounting system. This necessitates the integration of advanced ICT architecture, software and personnel to operate the system while ensuring that all the workers have gained affinity with the procedural approach required. The SEC proposed the adoption of the COSO (Committee of Sponsoring Organizations) Integrated Framework, which although integrating controls on company operations and accounting reporting lacks adequate IT management. The Information Systems Audit and Control Association (ISACA) created COBIT system (Control Objectives for Information Technology) that addresses IT controls offers a more integrated framework including “planning and organization, acquisition and implementation, delivery and support, and monitoring” (Byrum, 2004, p. 6). Although SOX provisions do not adequately address the specific requirements for information handling within the ICT sector, companies are obligated to set up their own compliant systems that not only address the SOX requirements but also enhance the firm’s own strategic objectives. Nonetheless Barrett and Stanek (2003) assert that the most critical aspect of an effective and efficient IT system must integrate adequate “infrastructure security, access control, and contingency planning” (Pg. 1). Sarbanes-Oxley Act and the Predominance of the Big Four Following of the collapse of the tainted Enron enjoined audit firm Arthur Andersen, the four remaining major accounting firms are Deloitte, KPMG, PricewaterhouseCoopers, and Ernst & Young firms who are now dubbed the Big Four. Due to their large size and customer base, the firms have easily being able to comply with the SOX requirements hence are able to dominate corporate US and international accounting auditing markets (The Economist, 2005). The large firms therefore charge hefty fees due to these latent advantages. Nonetheless, smaller firms have taken advantage of the SOX guidelines that prohibit the five years limits to conflict of interest issues (Bergen, 2005). Audit firms are therefore uniquely positioned to take advantage of the SOX requirements to entrench themselves in strategic business formulation that now necessitates the contribution of accounting reporting systems and guidelines. According to Soileau (2003) “as SOX legislation has been enacted to protect investors, it will provide the internal audit profession with a prime opportunity to become one of the cornerstones of business” (Pg. 10). Concerns have been raised over the dominance of the “Big 4” even as smaller firms are deemed incapable of handling large accounts thus leading to overconcentration of clients among the “Big 4”. A SEC/SOX instituted United States General Accounting Office (GAO) study asserted that the lack of capacity for the significantly smaller audit firms “raises potential choice, price, quality, and concentration risk concerns” (GAO, 2003). The GAO (2003) study indicated that the Big 4 handle over 78 percent of all US listed corporations and 99 percent of their business transactions (Cosgrove and Niederjohn, 2006). Moreover, the SEC Final Rule on audit independence as set by SOX guidelines forbid the firms from nine specific non-audit services [see Table:1] (SEC, 2003). Effect on Academic Curriculums The Sarbanes-Oxley act of 2002 has affected academic curriculums with business schools forced to incorporate their teaching programs with SOX information predominantly for accounting (CPA) students (Reed et al, 2007). The new curriculum for CPAs will have to be reframed as some of the existing guidelines for practising CPAs have been overhauled by the Act hence an enhanced learning module must be formulated in line with SOX guidelines and professional ethics of the American Institute of CPAs (AICPA). Students, lecturers, AICPA and other stakeholders will have to come to terms with the fact that the industry is no longer self-regulated but now has a government oversight board (PCAOB) overlooking their operations. The Sarbanes-Oxley is composed of eleven titles and sixty-six subtitles. NYSE and NASDAQ The New York Stock Exchange (NYSE) and NASDAQ adopted new listing standards in line with the new SOX and SEC guidelines that called for a clear distinction of the duties of management and corporate boards or their independence as per their roles. The new rules require board sittings as well as management meetings are conducted without any interlocking presence of members of both teams thus clearly depicting their independence (Reed et al, 2007). Extension to Non-Public Organisations Although the provisions of the Sarbanes-Oxley act of 2002 were meant to regulate the operations of public listed companies, the need to have the act expanded to include other public organisations like local governments and other public non-profit entities. This provisions are been considered essential due to the need to extend protection for public funds which are controlled by a few individuals without adequate regulatory and oversight by independent public organisations (McGladrey & Pullen, 2004). Figure 3 Selected Critical Sections of the Sarbanes-Oxley Act of 2002 Provisions Source: Adapted from Mayer (2005 Summary Investor confidence was therefore somewhat restored by the Sarbanes-Oxley Act of 2002 though recent events though not fully related to accounting fraud still reflect some degree of financial maneuvering by corporations this time led by mortgage firms that resulted in the current global financial crisis[See Figure 3]. However Rep. Oxley the co-creator of SOX reckons that investors, “feel that they are being treated more fairly now and the bad guys are being punished for wrecking their faith in those publicly traded corporations” (Business Wire, 2004). The current global financial crisis that was precipitated by the machinations of Wall Street investors and mortgage brokers has revealed that despite copious criticisms, corporate oversight regulations can never be too imperious or invasive. In a testimony before the U.S. House Committee on Financial Service, relating to the impact of the Sarbanes-Oxley Act, by Christopher Cox the Chairman of the U.S. Securities & Exchange Commission in September 2006 outlined some of the significant advances made since the implementation of the SOX act (Cox, 2006). These include: Investor confidence has been restored The Act or its provisions have been adopted by many progressive developed markets in other countries including EU, Japan, China, Australia, Canada, Brazil and Mexico among others. Over 95 percent compliance by US, public firms have now fully complied with the SOX tenets. Executive responsibility has been considerably enhanced as desired by the Act through Section 302 and 906 whereby the CEOs are obligated to personally endorse the quarterly and annual reports. These sections have imposed accountability on the business leaders in ensuring transparency and even-handedness. Section 301 has ensured the independence of audit committees hence are the only mandated body responsible for the “appointment, compensation, retention, and oversight of a company's outside auditor.” Additionally the audit committees have control over their budgets to guarantee their full independence from corporate leaders while also managing whistleblower’s tips and objections. The separation of the audit and non-audit duties (consulting services) as previously practised by the external auditing firms to become separate units with no duplication. Although there has been an outcry over Section 404 provisions that necessitated much expenditure, SEC has eased the passage of small firms (having less that $75 million revenue) and foreign firms through extensions. The oversight authority of the PCAOB that overrides previous self-regulatory regimes by accounting bodies will lead to greater transparency. Conclusion The impact of the Sarbanes-Oxley act of 2002 has been profound, as public businesses were forced to become more transparent and accountable. Although the Act has greatly enhanced investor confidence, many companies have been forced to fork out hefty accounting fees to comply with the provisions of the act. Invariably the biggest losers have been those firms that were devious in their accounting practices as well as the audit firms who have been operating dual roles of audit and consultancy. However small companies have been adversely affected by the expenditure involved in the SOX compliance. Nevertheless, though most of the small firms are disproportionately beset by the high relative costs needed to keep up with the SOX requirements, comparatively the small ICT firms are inundated by many clients needing their services to establish internal IT systems that can effectively churn out the proper accounting reports. 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