4 what costs does it impose on corporations how does

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4. What costs does it impose on corporations? How does the cost vary with the size of the corporation? FIRMS are hiring new people which labor is a cost Audit fees are substantial - managements must assess their companies' internal financial controls and have their outside accountants audit those controls annually. Internal costs, opportunity costs, and intangibles are other costs. SOX compliance weighs disproportionately on small public corporations. For many of these firms, operating on thin margins, the additional cost is a significant percentage of their annual revenues. Costs- which calls for managements to assess their companies' internal financial controls -- and to have their outside accountants audit those controls annually. Corporate executives must certify their financial statements and internal controls personally The costs have been higher than they have thought to uphold this act The cost is large for small PUBLIC corporations. Costs are disproportionately borne on small companies Small companies are going private (or staying private) at least in part of anticipation of the added expense Absorbed management attention for a significant period, distracted them from the actual business decisions they should have been making 5. How does it affect firms’ decisions about listing? What sorts of firms are likely to be affected most? How are firms responding? It discourages firms from going public – they instead are opting for financing from private-equity firms.
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The article also notes that Sarbanes-Oxley has ‘made it harder for small companies to attract outsiders to sit on their boards,’ likely because the good directors don’t want to take this risk in the SOX environment. “This is a boon for private equity funds. But since going public is an important venture capital exit strategy, partially closing the exit could impede start-up financing, and therefore make it harder to get ideas off the ground.” In 2005, only one of the 25 largest initial public offerings in the world took place in America Firms are finding it easier and cheaper to list their shares and raise capital in Hong Kong and London “Having innovative companies use foreign sources of capital slows America’s entrepreneurial spirit and economic growth” 6. What has been the impact on equity markets? There is evidence that SOX did have an effect in causing firms to eliminate or reduce public ownership. Evidence of smaller firms’ negative share price reactions to SOX, and of more positive share price reactions to going private after enactment of SOX than before, supports the inferences o that SOX caused at least some going private transactions, and that the costs of remaining public are higher after SOX. o There is also evidence that firms with higher audit fees were more likely to go dark, thereby linking this decision with the costs of complying with SOX.
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