The Effect of the Sarbanes/Oxley Act on Innovation in American Corporations

By Wendy Vidlak
This thesis for the Master of Arts in Organizational Management degree
Concordia University - Saint Paul, Minnesota

Richard Brynteson, Chair
Craig Lien, Reader

Concordia University College of Graduate & Continuing Studies
Master of Arts in Organizational Management
Copyright by Wendy Vidlak, 2007
All Rights Reserved

For a digital copy of the thesis click here.

Acknowledgements

Special thanks goes to Richard Brynteson and Craig Lien for helping with advice and being willing to read and review this paper. Thanks to the many friends and family members who offered encouragement, interview contacts, and the occasional harassment to help me finish this up.

ABSTRACT

The purpose of the research is to ascertain the effects of the Sarbanes-Oxley Act, specifically section 404, on innovation in America’s publicly held corporations. The research started by compiling a random sample of 100 companies and then examined the trademark and patent applications before and after the institution of the Sarbanes/Oxley law. It also compared the R&D expenses with administration costs at these companies before and after the law took effect. The researcher then conducted several interviews to see if there might be causation to the correlation of the quantitative findings. Virtually every company did see an increase in accounting costs in relation to Sarbanes/Oxley implementation. Some firms did experience a reduction of R&D costs, but that was not the case throughout. Innovation was effected positively, negatively and neutrally in large part due to the regulatory environment of the company before the law and the culture of the company.

TABLE OF CONTENTS

Chapter I. INTRODUCTION AND STATEMENT OF HYPOTHESES

Statement of the Problem
Purpose of the Study
Research Questions and Hypotheses
Limitations of the Research
Definitions and Terms
Abbreviations
Assumptions
The Importance of the Study

Chapter II. REVIEW OF LITURATURE

What is Innovation?
What is the Sarbanes Oxley Act Section 404?
Financial Costs of Compliance Under the Act
Organizational Risk, Innovation and Sarbanes-Oxley Act
Rigid Procedures, Section 404 and Innovation
Financial Laws
Other Regulatory Effects on Innovations
FDA Regulations
Regulation of the Food Industry in Great Britain
Nuclear Regulations after Three Mile Island

Chapter III. METHOD

Synopsis of Quantitative Research
Synopsis of Qualitative Research
Subjects
Materials and Procedures

Chapter IV. RESULTS

Thesis Statement I
The Costs of Implementing Section 404 are quite high and many corporations are funding the increased accounting costs by reducing research and development
Thesis Statement II
Section 404’s emphasis on measuring corporate risk is creating a culture of risk aversion among top executives and stifling innovation in areas of new product development.
Thesis Statement III
That section 404 is creating some innovations in the areas of financial reporting and procedures as companies attempt to reduce costs of compliance and open their financial processes to public scrutiny.

Chapter V. DISCUSSION

Literature Review Implications
Public Policy Implications
General Business Implications
Review of the Findings

Appendix A Tables and Figures

Table 1 - List of Companies Studied
Table 2 - Interview Questions
Table 3 - R&D Expenses S&P 500 Companies
Table 4 - R&D Expenses Russell 2000 Companies
Table 5 - Administration Expenses S&P 500 Companies
Table 6 - Administration Expenses Russell 2000 Companies
Table 7 - Trademark Applications S&P 500 Companies
Table 8 - Trademark Applications Russell 2000 Companies
Table 9 - Patent Applications S&P 500 Companies
Table 10 - Patent Applications Russell 2000 Companies

APPENDIX A

The appendix is located here. It is in MS word format.

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