How Much Does Sarbanes-Oxley Cost?

There’s a meme circulating now amongst the sloping forehead crowd that Sarbanes-Oxley costs exceed $1.4 trillion dollars. The way that was calculated was the drop in stock market market capitilization during July 2002 when the legislation was passed.

Somehow, SOX gets the entire responsibility for that July 2002 sell off; Even more amusing, SOX gets none of the credit for any subsequent rise in market capitilization since then — it simply gets ignored; Further, this researcher thinks that the only factor impacting market action was Congressional legislation — and not all legislation, just SOX. (Recall we previously addressed that  analytical foible in Single vs. Multiple Variable Analysis in Market Forecasts).

That’s quite a neat analytical trick (putting aside false assumptions, and a more or less total ignorance of what actually drives markets).

I have no stake, and less of an opinion, in Sarbanes Oxeley. But I have zero tolerance for intellectual dishonesty. So let’s take one more review this bit of misdirection:

How Much Did Sarbanes-Oxely Impact Markets?

Market Action Leading up to the Legislation’s Debate and Passage (1/99-12/02)
Click for larger chart


Source: BigCharts

Market’s Performance Since Sarbanes Oxley (7/02-6/05)
Click for larger chart

Source: BigCharts


The charts prove how ridiculous the assertion is that SOX cost the market’s a over a trillion in cap:

a) intelligent and experienced investors know that no single factor can take credit for what the markets do;
b) The prior trend pre-SOX was a long and relentless slide down;
c) Nasdaq was in the process of bottoming around the same time;
d) the Nasdaq has doubled since Sarbanes Oxley passed!

Let me again reiterate my long standing belief that no single variable accurately predicts market behavior as discussed here: Single vs. Multiple Variable Analysis in Market Forecasts.

Further, as I discussed extensively in Lose the News, headlines do not drive markets, as the news reporting tends to be rearward looking and already discounted by markets.

Additionally, I point you to Gary B. Smith’s  analysis of major events, which supports the argument that even extremely significant news events — The Pearl Harbor attack, the Assassination of JFK, and the September 11th Terrorist Attacks — do little than temporarily roil the markets for a relatively short period of time. After the immediate impact of these events, markets subsequently resume their prior, pre-event course. 

Lastly, have a look at the WSJ’s "Numbers Guy". Carl Bialik took a look at SOX. Not surprisingly, he found the analytical rigor of this study wanting:

The $1.4 trillion in market losses [Rochester accounting graduate student Ivy Xiying Zhang] identifies came almost
entirely during three periods, all in July 2002: the Senate’s debate of
the bill from July 8-12, during which time President Bush delivered a
speech backing corporate reforms; a period from July 18-23 when the
House and Senate wrangled over competing versions of the bill; and a
period from July 24-26 when the Senate and House reached agreement. The
market tanked in that second period, reflecting about three-quarters of
Ms. Zhang’s estimated losses.

If are all really, really lucky, than perhaps Ms. Zhang will be on the other side of our trades in the future. Let’s hope she knows more about accounting than she does about how the markets work.   


How Much Is It Really Costing To Comply With Sarbanes-Oxley?
Carl Bialik
WSJ, June 16, 2005,,SB111885041027560378,00.html

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  1. Monty’s Bluff commented on Jun 19

    Question those convenient facts!

    I set out to comment on some rather humorous “empirical” research making the rounds right now that pegs the costs of Sarbanes-Oxley at greater than $1.4 trillion. The very size of that cost number raises a red flag and should make most pe…

  2. john j commented on Jun 20

    Re:”A Washington Times article recently quoted a study putting the cost of Sarbanes
    Oxley at $1.4 Trillion dollars”

    Seems to me if SOX is costing a lot, then the Big4 should be getting huge bucks and the need for accountants would have gone through the roof. Especially since they would be picking up AA’s old piece also.

    I looked at KPMG anual reports. Tax revenue (world wide) ’02(4.72B), ’03(5.68B), ’04 (6.42B). A nice 20% and 13% increase, but where is the 2-10X extra cost that seems to be talked about? [would have looked at
    Americas’ revenue brakedown, but could not easily find ’02 figures. ’03 @4.27B, and ’04@4.93B for all of Americas – even less of a trace of huge windfalls from SOX.]

  3. Dustin commented on Jun 20

    As a CPA and former auditor, I would add a couple of thoughts here:

    1. Even if we grant that SOX cost a large amount (though 1.4T seems way too high), it’s useful to remember that much of that was one-time start-up cost – putting in new controls and procedures, gathering documentation not previously required, just figuring out what was required, etc. We’ll definitely see the cost of compliance go down over time simply due to learning curve effect.

    2. Though badly measured here, the cost of compliance is at least somewhat quanitifiable. The benefits of the legislation in terms of more reliable reporting and faith in the market are almost totally subjective, however. In my view, at least, the benefits far outweigh the costs – things were played fast and loose for way too long until an Enron/Worldcom scandal was inevitable. All of the restatements we’ve seen have proved that they were not isolated cases.

    3. Further to John J. above – now is a great time to be an accountant, but you’re right – not to the extent these figures would indicate. One point to remember, however, is that SOX requires much more internal control than before, so the real increase has been to internal audit staff instead of public accountancy firms. The NYSE firm where I worked added 10 to 20 new positions related to SOX compliance.

  4. Schadefreunde commented on Jun 20

    The Big Picture – How much does SOX cost?

    Here’s a blog post looking at the cost of SOX or rather trying to debunk attempts to put a number on the costs. The approach Barry took was interesting.

  5. James commented on Jan 2


    did you read the paper? She uses a multi-factor model. The only single-factor model for estimating the cost of Sarbanes-Oxley are the charts on your own website.

    Her paper is here – maybe you should try reading it before you comment on it.



  6. Beaumont commented on Jan 18

    That post by Dustin is not a troll. IF you read the paper, it is extremely well researched and considers multiple and complex factors. It is a far more exhaustively researched opinion than those contained in this blog. Of course, it is unfair to compare blogs to research papers. Still, any refutation of the paper will have to have more in depth analysis than contained on this site.

    So not a troll. Actually a legit observation. You woudl do well to heed such posts.

  7. Sudip commented on Apr 28

    I just wanted to point out one thing regarding this dissertation. One of the periods of study is July 18-23. As most of you know, WorldCom filed for bankruptcy protection on July 22. I think this event had more to do with the loss of $1.4 trillion in market cap than the passing/discussion of the law in Congress.

  8. Sudip commented on Apr 28

    I just wanted to point out one thing regarding this dissertation. One of the periods of study is July 18-23. As most of you know, WorldCom filed for bankruptcy protection on July 22. I think this event had more to do with the loss of $1.4 trillion in market cap than the passing/discussion of the law in Congress.

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