THE IMPACT OF SARBANES‐OXLEY ON OFF‐BALANCE SHEET SUPPLY CHAIN ACTIVITIES

SUMMARY AND IMPLICATIONS This section briefly summarizes study results and then discusses implications for supply chain managers and researchers. The stated goals of this article were threefold. First, it sought to provide readers with an overview of SOX and how it relates to common off-balance sheet activities such as vendor managed inventory agreements, long term and short term purchase agreements, outsourcing agreements, and inventory accuracy. Second, it sought to educate readers on how this Act potentially impacts supply chain professionals in general, and used agency theory as the theoretical foundation for this research. Third, it sought to assess the impact that Section 401 has had on commonly used off-balance sheet supply functions. To accomplish these objectives, the authors sought to answer three research questions, which were designed to assess the impact that SOX has had on supply management. The study revealed a number of important and interesting findings. For example, contrary to popular belief, it was found that the majority of respondents were generally familiar with SOX. Not surprisingly, this research also found that respondents employed by publicly held firms possessed greater levels of familiarity with SOX than those from private firms. In addition, those in publicly held firms reported they were more familiar with their firm’s response to SOX than those from privately held firms. The second research question produced equally important and interesting results in that it was found that the stronger SOX compliance, the more positive the effect has been on off-balance sheet activities such as vendor managed inventories, short-term purchasing agreements, long-term purchasing agreements, and outsourced agreements. This result is in tune with previous research findings on SOX compliance stating that the impact SOX has had has been more positive for more compliant firms with effective corporate governance, reliable financial reporting and credible audit functions prior to its enactment than less compliant firms. In addition, this research bolsters the notion that SOX may be helping to level the field between principals and agents by better supplying symmetric information flows, or at least boosting trust in the information flow, since off-balance sheet activities must be documented more fully. Therefore, it should follow that the improved transparency promised by SOX can provide improved principal-agent relations within the supply chain, namely with regard to off-balance sheet activities. This finding is important from both a theoretical and managerial perspective, because it demonstrates the potentially positive impacts associated with effective principal agent relationships and potential for minimizing the negative aspects of agency (i.e., moral hazard and adverse selection). Although SOX may have increased the costs associated with the principal-agent relationship, these findings may reinforce the notion that top management could ease the transition into SOX compliance by espousing positive attitudes regarding SOX and the possible benefits surrounding off-balance-sheet activities. The third important research finding afforded by this research indicates that time spent by supply chain managers working to ensure SOX compliance is directly related to their perceptions of SOX impact. More specifically, supply chain managers who spent > 15% of their time working to ensure SOX compliance exhibited more negative perceptions of SOX than those who spend less time.