SOX: It's still not just about small firms

Foley & Lardner reports that in 2005 small-cap companies had a 22 percent increase in audit fees, while the increases for mid-cap and S & P companies were 6 percent and 4 percent respectively. The firm says that "this year's study provides support for the perception that Section 404 disproportionately impacts smaller public companies." The data also suggests that costs are declining for large firms as they learn how to comply.

However, as Henry Butler and I stress in our book, The Sarbanes-Oxley Debacle, direct compliance costs are only the tip of a very large iceberg of costs, some of which we’re only just becoming aware of. And when you look at all costs, SOX is not just a small-firm or temporary problem. 

Butler & I highlight, among other things, litigation costs.  We focus on costs of litigating SOX, but it turns out that we missed the increased post-SOX costs of litigating everything. And when you look at litigation generally, big firms may come out worse than small firms.

This broader litigation cost problem is discussed by Garrie and Armstrong, The Sarbanes-Oakley Act's Effect on Electronic Discovery. Here’s the abstract:

While the Sarbanes-Oxley Act was intended to protect and increase publicly held corporations' accountability, lurking in the background are judicial inequities resulting from mandatory Sarbanes-Oxley technology investment. Sarbanes-Oxley compels public companies to invest millions in new technology while exempting private corporations from these costs. Consequently, in the discovery phase of a private versus public company dispute, the private litigant's discovery costs are likely to be more burdensome than the public corporation's costs. This provides the private litigant with a stronger and more compelling judicial argument to transfer costs to the discovering party under the Zubulake framework. Both attorneys and judges must be mindful of this potential e-discovery loophole

Comments

[Jeff Lipshaw]

A fruitful area for research might be the extent to which there are real or perceived benefits to the fact and process, rather than the outcome, of litigation.

Suppose Company A is threatened by Company B's entry into the market, and has a barely colorable patent infringement claim against B. The normal cost-benefit analysis that depends solely on the result of the lawsuit misses the sales benefit Company A receives by being able to suggest, merely because of the pendency of the lawsuit, that Company B is not a long-term player, or that customers will be roped into the dispute.

Or suppose not just the cost of discovery, but the possibility of discovery is a valuable strategic tool.

My view of significant litigation cost outlay might be significantly different if I perceive a return akin to sales and marketing expense.

Well, there's a hypothesis....

[Jake]

Two brief points.

1. Companies that dislike SOX can opt out of the public securities markets, and into private venture capital.

2. Costly discovery of electronic records was a horse out of the barn long before SOX.

What amazes me is that, to this day, you can serve a subpoena on Wall Street, explicitly asking for fully executable electronic copies of records maintained in computerized form, yet have the investment bank produce only hard copies of whatever the software generates, but not the executable computerized records themselves.

The companies that complain so bitterly about post-SOX discovery costs should contemplate whether such sharp practice by their white shoe NY law firms is the true cause.