The unintended effects of the Sarbanes–Oxley Act of 2002

The auditing profession came under intense scrutiny following the collapse of Enron and several other leading firms. Legislators responded swiftly with the Sarbanes–Oxley Act of 2002, a stringent rules-based system widely considered the most comprehensive economic regulation since the New Deal. Researchers such as DeFond and Francis, 2005, Baker, 2008a and Baker, 2008b suggest the law may produce serious unintended harmful consequences, resulting in a call for further research to evaluate its impact upon firms. This paper contributes to this literature in several ways. First, it conducts a review and analysis of multiple literatures to formulate several exploratory hypotheses. Second, the strength of the conceptual model is evaluated using a random sample survey of Fortune 500 CEOs (n = 206). This represents the first scholarly attempt to evaluate managerial perception of this important law, which Buckley and Chapman (1997) suggest may be more relevant that its actual costs. Third, drawing from Carmona and Trombetta (2008), we suggest the law’s overarching reliance upon strict, inflexible rules may have influenced CEO perception of Sarbanes–Oxley. Since this is not a cost/benefit analysis, neither the potential benefits of the law nor its net effects were evaluated.