A story in today's Washington Post discusses the costs that Sarbanes-Oxley imposes on small firms:
Smaller companies face disproportionately higher costs than bigger firms to comply with new, post-Enron investor-protection rules, but much of the added burden comes from one-time start-up expenses and confusion over how to begin compliance, a congressional study concludes.
The effect on small and mid-size public companies has been debated since the new rules were adopted by Congress as part of the Sarbanes-Oxley Act of 2002.
Congress passed Sarbanes-Oxley (SOX) after the Enron and Worldcom corporate accounting scandals. SOX imposes new requirements that allegeldy force corporate executives to "take responsibility" for corporate accounting.
The effect of SOX on small versus large firms is a general feature of much economic regulation. Thus one effect of regulation is to insulate large incumbent firms from the competition provided by small startups.
And this is only one negative aspect of SOX. Most of what SOX outlawed was already illegal, so SOX created an additional regulatory burden with little additional bite. Enforcement of SOX is essentially impossible; the requirements apply to so many activities at so many firms that law enforcement cannot possibly monitor compliance. Thus dishonest corporate executives can easily evade SOX.
A better approach to reducing corporate malfeasance is a combination of two policy changes: repealing the corporate income tax and eliminating the Securities and Exchange Commission.
Repealing the corporate income tax would make corporate accounting far more transparent since most complications arise from (legal) tax avoidance behavior.
Eliminating the SEC would make investors bear full responsibility for monitoring corporate behavior. This occurs to a substantial degree already, since the SEC cannot effectively monitor all the firms subjects to its regulations. But eliminating the SEC would spur additional private monitoring and strenghten investor incentives to engage in due diligence.