Celebrating its 10th anniversary this year, the Sarbanes-Oxley Act is provoking a retrospective look at the good and bad after-effects of the landmark legislation.
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Enacted in response to the accounting scandals of the early 2000s, including Enron, WorldCom and Tyco, the law drew nearly unanimous support when it passed the Senate, an unusual feat considering the current state of hyperpartisan recrimination in Congress.
“Sarbanes-Oxley was a slam dunk in Congress,” recalled Steven Harris, a member of the Public Company Accounting Oversight Board who used to serve as staff director and chief counsel on the Senate Banking Committee under Chairman Paul Sarbanes, D-Md., during the consideration and passage of SOX. “There was not a word of opposition, with the exception of the accounting profession. The self-regulation of the accounting profession for 100 years was an absolute failure.”
Harris spoke at a panel discussion on Sarbanes-Oxley on Monday at New York University’s Stern School of Business with a group of other regulators, standard-setters, attorneys, accountants and academics.
His predecessor on the board, Kayla Gillan, was one of the original members of the PCAOB after serving at CalPERS as general counsel. She is now a principal in PricewaterhouseCoopers’ assurance practice. “Going from self-regulation to an independent overseer made the auditing profession more accountable,” she said. Gillan believes behavior has significantly changed as a result of SOX, among auditors and audit committee members. However, she and other acknowledged that the costs of implementing SOX had been disproportionately higher for small companies.
The panelists agreed there is room for improvement. “Audit quality could improve,” said Bob Herz, the former chairman of the Financial Accounting Standards Board and now a member of the audit committees at Morgan Standard and Fannie Mae, as well as a Columbia University professor. “Obviously it could.” But he believes SOX on balance has largely achieved its objectives.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, sounded a more skeptical note. “There’s an old saying, ‘be careful of what you wish for or you may get it,’” he said. “Some good things came out of Sarbanes-Oxley and some were problematic.” He acknowledged that SOX had advanced what good governance advocates like him had been pushing for a long time, but he still sees significant negatives in the way board members now behave. He believes there need to be changes not only in the composition of the board, but also in their practices.
“I’ve been on audit committees pre-SOX, but also post-SOX,” he said. “The meetings are much longer. You’re locked in the room with the same people for hours, and you notice if they have any kind of nervous tic or have been eating an onion sandwich.” He said that many of the board meetings had devolved into a kind of “kabuki theater” in which board members habitually brought up the same points.
Stephen Brown, a senior director of corporate governance and associate general counsel at TIAA-CREF, noted that Sarbanes-Oxley is “still incredibly expensive to implement.” In a former life, he worked at law firms like Skadden Arps and Wilmer Hale when they were representing companies like Enron and WorldCom. “It was such an interesting time,” he recalled. “It seemed like everyone was calling up. Either they had been subpoenaed by the SEC or they were afraid they were going to be subpoenaed.”
Sy Jones, associate director of NYU Stern’s Vincent C. Ross Institute of Accounting Research, noted that the legislation took many accountants out of the consulting business. He believes that if more accountants had been in a position to advise clients on risk management, some of the problems that happened later during the financial crisis might have been avoided. “The auditor was in a position to help the client to evaluate those risks,” he said.