The Sarbanes-Oxley Act of 2002 was approved in the wake of financial market uncertainly caused by the collapses of Worldcom, Inc. and Enron. Not only were the financial statements approved despite fraudulent misstatements, but the CPA's on the audit had helped management design the fraud scheles in the first place. Though good in spirit, the Act called for regulations on all public corporations, regardless of their size. The resulting burdens on small- and mid-sized have slowed the growth of this critical component of the U.S. economy.
The independence and control procedures laid out in the Sarbanes-Oxley Act were designed for a large, complicated corporation whose investors were far removed from management. The increased costs of compliance with these requirements make being a "public corporation" far more expensive for small firms. Consequently their ability to raise capital may be inhibited by their audit budgets.
The most obvious additional cost from the Sarbanes-Oxley Act is the audit of internal control procedures. The control procedures of a company must now be examined in addition to the transactions, usually by another CPA firm. "Interviewees estimated this additional attestation fee would range from 25% to more than 100% of current audit fees." (Coustan et al.)
Assessing internal controls is nothing new to CPA's. Indeed, the testing of internal controls is often done weeks or even months before the actual audit. In the past, the audit team has used the strength of these controls to determine the extent of substantive testing that was necessary. Furthermore, reporting weaknesses in the internal control structure and suggesting methods of improvement were considered a fundamental aspect of an audit. Helping the company grow stronger was just as important as attesting to the financial statements.
Today, under the Sarbanes-Oxley Act, designing the internal control structure, attesting to the workings of...