Former U.S. Sen. Paul Sarbanes and former U.S. Rep. Michael Oxley say the regulations they sponsored and saw signed into law a decade ago are not perfect, but led to changes in the corporate culture in the United States and abroad.
Sarbanes, a Maryland Democrat, and Oxley, an Ohio Republican, took part in a conversation Monday to mark the 10th anniversary of the Sarbanes-Oxley Act (SOX), which in part enhanced standards for internal controls over financial reporting in the wake of several corporate scandals in the early 2000s. The law set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
The two shared their thoughts on the wide-reaching impact of SOX – from how it increased communication among participants in the financial reporting process to what it has done for corporate culture – with Mark Beasley, a North Carolina State University accounting professor, who moderated the discussion. And they spoke about how they think their legislation will have a lasting impression on business in the decades to come.
Their comments came less than a week after a U.S. House of Representatives subcommittee debated the benefits and costs of SOX—and a bill that would decrease its scope. The House Subcommittee on Capital Markets and Government Sponsored Enterprises heard sharply divided opinions on Thursday from representatives, business leaders, and academics who discussed the bill that President George W. Bush signed into law on July 30, 2002.
Monday’s discussion was sponsored by the Center for Audit Quality, which is affiliated with the AICPA. An archived broadcast of the discussion is available at the SEC Historical Society website. Here are some highlights:
“Erosion” at work: Both former lawmakers expressed concern over what Sarbanes called the “erosion” taking place with regard to which companies are required to implement SOX Section 404(b), which requires a public company’s auditor to attest to, and report on, management’s assessment of its internal controls.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203, granted a permanent exemption from SOX Section 404(b) for public companies with less than $75 million in market capitalization. The implementation date for companies that fell below that threshold had been repeatedly delayed by the SEC. The Jumpstart Our Business Startups (JOBS) Act, P.L. 112-106, was passed in April and defers the effective date of Section 404(b) compliance for the first five years after an initial public offering for certain emerging growth companies.
And Rep. Michael Fitzpatrick, R-Pa., earlier this month introduced H.R. 6161, known as the “Fostering Innovation Act,” which would exempt certain small companies from SOX 404(b).
Sarbanes called the JOBS Act exemptions “a scandal waiting to happen” because of the number and size of emerging growth companies that could be exempt for five years from the SOX 404(b) internal control provisions.
Oxley appeared to agree: “They are going to have a scandal, and then the investors are going to complain that the regulators screwed it up, or it’s Sarbanes-Oxley’s fault, or something else,” Oxley said. “... It will be interesting to see the revisionist history after that happens.”
On audit communication: Sarbanes said communication between auditors and audit committees needs to be strengthened, but he believes the work being done has made public companies more transparent.
“Anyone who’s a member of an audit committee of a public company will be the first to admit the workload has increased significantly, which is as it should be,” Sarbanes said. “I think they are making an important difference. … They act as a check. … All we want is honest recordkeeping. That’s what we’re trying to get. It sounds like a pretty simple thing to say, but we weren’t getting it out of a lot of significant companies.”
On worldwide change: One of SOX’s peripheral effects came outside U.S. borders. Several other countries passed similar laws in response.
“Other countries are establishing their versions of Sarbanes-Oxley,” Sarbanes said. “So they are moving in our direction, which is encouraging, because there was some concern—are we going to go to the lowest standard or the highest standard? Generally speaking, the world has gone to the higher standard.”
Oxley said he hoped he could look back 10 years from now and see the effect of the law spread even more.
“I think that the spread worldwide continues in places far off, and it will continue that march forward. That’s all to the benefit, frankly, of the investing public, the people that invest in companies and create jobs and make a better life for everybody else. That is really what it is all about.”
On changing corporate culture: Oxley and Sarbanes, in discussing the effectiveness of the law, said they think SOX has helped strengthen corporate ethics and the tone at the top.
Oxley cited an Ethics Resource Center study that said 96% of employees knew about the corporate structure and about some of the ethics and compliance guidelines their companies have put in place. “I bet 10 years ago, that number was half that,” Oxley said.
Sarbanes added that the legislation was designed to help the people who want to do the right thing. “It is designed to screen out … the corner cutters, the people who want to cheat.”
Sarbanes added that he thought SOX had also improved communication between auditors and executives. He told a story of a man who approached him and lauded the bill. Sarbanes was skeptical because he was used to hearing criticism, so he asked the man what he did for a living. The man was an internal auditor. “Before your bill came along, if I wanted to see the CEO or CFO, I could never get in to see them,” Sarbanes recalls the man saying. “… Now, since your bill, any time I want to see them, I walk right into their office.”
Sarbanes added that he hopes the act continues to become a part of the way business is done in this country. “So much a part of establishing the standards,” he said, “that it is not seen as something separate and apart. That it really becomes part of the very structure of the business world. And what comes of that, of course, are higher standards, more ethical behavior, and to the benefit of everyone.”
—Neil Amato (firstname.lastname@example.org) is a JofA senior editor.