Monday, July 30, 2012

On SOX Tenth Anniversary, Senator Sarbanes and Rep. Oxley Note that Act Restored Investor Confidence in the Financial Markets

On the tenth anniversary of the enactment of the Sarbanes-Oxley Act, the sponsors of the legislation said that the Act has been successful in preventing large-scale accounting fraud at public companies. At a seminar sponsored by the Center for Audit Quality and the SEC Historical Society, Senator Paul Sarbanes (D-MD) said that the Act was designed to aid investor protection and restore public confidence in the integrity of the financial markets, adding that the processes mandated by the Act have become part and parcel of the process for public companies and, in the words of former SEC Chair William Donaldson, become part of the DNA of public companies. The integrity of the U.S. financial markets is an important economic asset for the U.S. and undermining the Act would be detrimental to the U.S. economy.

Rep. Michael Oxley (R-OH) noted that the Act restored investor confidence in financial markets that had been badly shaken. The legislation enhanced transparency and accountability. Rep. Oxley mentioned that at the time the back dating of stock options was perceived by investors as a game for insiders.  Sarbanes-Oxley stopped this process by requiring two-day Form 4 electronic filing.

Senator Sarbanes noted that a significant part of the Act was the establishment of the PCAOB to oversee outside auditors of company financial statements, shifting the oversight process from self-review to an outside, independent, and objective body. The PCAOB has significantly enhanced auditing standards and practices, he noted, establishing very good procedures for establishing their auditing standards. Rep. Oxley added that the PCAOB is tackling difficult issues under a process has been a plus, much better and fairer than self-regulation

Senator Sarbanes and Rep. Oxley lauded the establishment of disclosure of the effectiveness of, and attestation of, internal controls over financial reporting mandated by Section 404. Internal controls build safeguards and set up a system of checks and balances, said Senator Sarbanes, so that policing would be done within the organization. Rep. Oxley said that Section 404 helped restore investor confidence, adding that the concepts in Section 404 are now ingrained in corporate structures and it would be folly to go the other way. Senator Sarbanes emphasized that internal financial controls are a very important part of the process, and is another way to screen out the bad actors early on before it gets to a regulator.

Senator Sarbanes noted that the Act enhanced the role of audit committees and how audit firms relate to audit committees. But we need to do more to enhance the role of audit committees, he said, specifically mentioning communications between the outside auditors and the audit committee.

Rep. Oxley mentioned that the Powers Report said gatekeepers had fallen down on the job and failed investors. Senator Sarbanes noted that the Act was designed to enhance the status of the gatekeepers by making the outside auditors more independent, and placing limitations on what services audit firms could provide to the company.