Though it’s been quite some time ago (about 15 years), many still remember the failings of companies like Enron, Tyco, WorldCom and Arthur Andersen that led to their collapse and the effects those scandals had on the accounting and finance industries. Federal lawmakers responded with the Sarbanes-Oxley Act of 2002 (SOX). With the recent passing of former Congressman Mike Oxley, we decided to take a look back at the creation of SOX and the impact it’s had on business.
See a Need, Fill a Need
The failings mentioned above created opportunities for large corporate fraud activities and bad practices, including external auditor conflicts of interest, lack of oversight, boardroom failures, low and weak enforcement of regulations and lack of accountability. As a result, two congressmen—Rep. Michael Oxley and Sen. Paul Sarbanes—created bills in their respective chambers to address these issues, among others. Shortly after the passing of each bill, WorldCom revealed its multibillion-dollar earnings overstatement, leading the two chambers to create a Conference Committee that melded the two bills into a single piece of legislation.
When SOX was created, Oxley was quoted by the Boston Globe as saying, “Investor confidence is almost an oxymoron these days,” and that the law would “make corporate executives who break the law and betray the public trust pay severely.”
SOX created The Public Company Accounting Oversight Board to independently oversee public accounting firms providing audit services and required auditor independence to limit conflicts of interest. In addition, it required corporate senior executives to take responsibility for the accuracy and completeness of financial reports as well as increased accountability through Title VIII, sometimes referred to as the Corporate and Criminal Fraud Accountability Act of 2002. SOX also included whistle-blower protection and clawbacks of executive pay in cases of wrongdoing.
For many companies, the cost of complying with SOX was significant. That said, relative to revenues, those costs have been decreasing for the last several years. Furthermore, the law has been viewed as beneficial in many regards. Besides increasing investor confidence, SOX increased fraud prevention, reliability of financial statements and corporate transparency. Plus, stronger internal controls offer a host of benefits.
Though some have bemoaned the cost of keeping up with SOX, something clearly needed to be done, and former Congressman Michael Oxley stepped up to create an effective law that left its mark on the accounting and finance world.