SOX ... You’ve Come a Long Way, Baby!

SEC Chairman Cox, Senator Sarbanes, Representative Oxley join AICPA in commemorating fifth anniversary of passage of landmark legislation.

September 6, 2007
by Sukanya Mitra

“Boards are more invigorated as they should have been, people [have started] believing in financial statements and the integrity of U.S. capital markets are all very good, but was not so five years ago pre-SOX,” noted Christopher Cox, Chairman of the U.S. Securities and Exchange Commission (SEC), at a recent AICPA Center for Audit Quality (CAQ) luncheon to mark the fifth anniversary of the passage of the Sarbanes Oxley Act.

Joining Cox was a legislative all-star team including Paul Sarbanes, former senator and former chairman, Senate Banking Committee, Michael Oxley, former U.S. representative and former chairman, House Financial Services Committee and two former SEC chairpersons — William Donaldson and Harvey Pitt, Public Company Accounting Oversight Board (PCAOB) chairperson Mark Olson and former PCAOB chairperson William J. McDonough.

Oxley joked how it was great to be a private citizen and still be covered by CSPAN. Oxley reminisced about how bad the state of affairs was five years ago. He reminded us that “our markets lost $8 trillion in market cap — that is four times the GDP of France. WorldCom alone went from $60 a share to $1 — total GDP of Israel or Portugal. Thousands lost savings, lost lives.”

Oxley added SOX solved the problem of insider stock deals by requiring reporting of sales within 24 hours, based on transparency and accountability. “Backdating options is an almost nonexistent practice,” he added.

Sarbanes likened “Enron [as] the canary in the mine shaft.” He agreed with Oxley about there being a general movement towards higher standards and that both Sarbanes’ and Oxley’s intention was to go back to making the gatekeepers, the gatekeepers because their duties seemed to have slid off that standard and “we needed to reestablish that important role for the auditors, the lawyers, for the audit committees and the board of directors, who of course now hire, fire and compensate the auditors.”


Experts say many good things have come out of Sarbanes-Oxley, including the restoration of investor confidence. The Public Company Accounting Oversight Board (PCAOB) was created and because of Section 404, whistleblowers have been given more protection. Cynthia Fornelli, former Deputy Director of the Division of Investment Management at the Securities and Exchange Commission and current Executive Director for AICPA’s Center for Audit Quality, notes, “the new emphasis on principles-based rather than bright-line rules-based accounting and auditing standards should allow public company auditors to continually work towards giving investors even greater confidence by striving to provide the highest quality of information.” Regarding the recent brouhaha over markets shifting to international quarters, Sarbanes said, “What is happening is the natural consequence of economic growth worldwide and market maturation. You’re getting capital markets now which are in a position to compete.” He added that it was necessary to “anticipate future developments on the so-called ‘BRIC countries’ — Brazil, Russia, India and China — all of which we need to keep our eye on.”

Sarbanes also pointed out that in 2005, the five largest initial public offerings (IPOs) were done overseas. While critics are quick to say that the shift to overseas is because of SOX, Sarbanes had another point of view. “Three of those companies were Chinese state-owned firms that went private, while the other two were French and were privatized by the French government,” he said.

And Now

Regarding concerns about the auditor concentration in the remaining Big Four accounting firms, Olson, chairman of PCAOB, said that the concentration is a global, not just national concern because Big Fours also exist in Europe as well as in other parts of the world, including the emerging markets. He sees two barriers to growth because of it. One being capital and the other being talent. Olson believes the “talent issue is the greatest barrier to growth. You’ll find niche players with various components of what is now the audit professional and … that there will be a greater use of that and then ultimately … the problem will go away. But it's a major problem right now, a major issue right now.”

How do you go about creating a regulator for the auditing profession? McDonough, former chair of the PCAOB, said they copied the Federal Reserve’s approach towards bank supervision. In essence he said this approach would mean they could work with small, mid-sized as well as large auditing firms and tell them, “We want you to fix yourselves. Our inspections will make it very clear whether you're doing so or not. If you do it well, we will reward you and if you do it badly, we will raise an unholy amount of hell.” Luckily, the message got through and there were a minuscule number of firms that had to be reprimanded.

And following the road to the one part of SOX that has received the most criticism, Section 404. Were any problems foreseen? “I think that almost immediately we began to realize that the application of 404 was headed in the wrong direction,” said Donaldson, former SEC chairman. “You have to think about the atmosphere out there, all the problems in Corporate America, the nervousness of the auditors, etc. and we found that the rule was not being, the 404 standards was not being, applied in the strategic sense,” he added. He said for 404 to be successful, it was necessary for it “to be a strategic top-down look. You're not supposed to count the paper clips and the rubber bands. And [the SEC and PCAOB] put out a statement saying that.”

Small Public Companies Beware

Although small public companies have been out of the loop and thus far they have not been required to comply with Section 404, Cox said that their requirement to comply has been deferred four times already and that “the current requirement is that the audit piece of 404, the requirement that you hire an auditor to come in and attest to what you've done as management, will kick in, in 2009.”

Final Thoughts

So what’s in SOX’s future? “There is competition and we need to compete, but at the highest level,” said Sarbanes. “The hallmark of U.S. capital markets has come a long way over the five-year period and [we] should hold onto it.”

Fornelli believes, “the Act’s influence will continue to expand and we will see further emulation among those who see the tremendous benefits of applying that basic principle.” Sarbanes restated that the legislators had acted promptly to put together a legislation that was not done in haste. He believes that now is the time to reestablish the system of checks and balances and the objective is to prevent harm from happening.

There are no guarantees. “You can't guarantee it, but you try to get these checks and balances working, these screening devices,” said Sarbanes. “In order to prevent it and I think relying on deterrents alone is not adequate,” he added.

“We hear a lot of criticism all the time about Congress can't do this. They can't do that. They're always tied up in wrangling,” said Oxley. “And yet we passed that legislation with a huge bipartisan majorities in a relatively quick period of time having studied it thoroughly. I think that's a real credit to the system and it's something that sometimes you don't really appreciate,” he concluded.

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Sukanya Mitra is Managing Editor of the Insider ™ e-newsletter group.