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.