We have read and heard a few things from people who are in the throes of complying with the Sarbanes-Oxley Act. The common theme runs something like this: "We're spending all this money and what are we getting in return?"
While it's an understandable sentiment, we're reminded of an old joke in which a hardened convict makes an appointment to see the new administrator. The first words out of his mouth are, "I don't like it here." There follows a long silence, and then the warden says, "You're not supposed to."
For those who don't like the SOX situation, we also say: You're not supposed to. The legislation was, after all, passed in response to an awakening that corporate governance and public financial reporting were not what they were supposed to be.
In fact, they were quite different from what people were being told by so-called "leaders" of the accounting profession. We still remember a former American Institute of CPAs chairman who brushed aside Enron on a national broadcast as a statistical anomaly, and then went on to claim that the great majority of all audits are dependable. Of course, subsequent events challenged the veracity of those claims, and ultimately condemned those who had long and stubbornly resisted all reforms.
Here is our position on SOX and this aftermath of compliance that is driving managers and accountants to distraction: It's payback time for us all! Think of this legislation as retribution for our past failures and remediation for past incompetencies. That is not to say that every company is getting what it deserves. SOX is being applied evenhandedly, in equal measure to the good, as well as the bad and the ugly. Sure, it's tough and expensive, but let's remember what made it necessary and then focus on the positive that will come from it.
We're sure that some already understand this point without elaboration. We're equally confident that many others are perplexed, so this column provides answers to the plaintive lament, "What did I do to deserve this?"
Poor reporting choices
Although the list of failings is long, we put at the top the propensity to make poor choices that do not reflect the bedrock premise that financial reporting is performed for the benefit of investors and the public. Instead, most, even virtually all, managers and accountants have thought and acted like monopolists. They believe they can decide what goes in financial statements and never answer for their flaws. The worst among them didn't even see the shortcomings and inadequacy of generally accepted accounting principles. Most probably still don't.
What poor choices? We can think of many, but here are a couple involving reporting policies.
The poster child is stock options. Despite the Financial Accounting Standards Board's recommendation, after lots of research and much common sense, that options should be expensed, virtually no one did so until 2001. Although the list of those who expense is longer now, it is still less than 1,000 out of nearly 20,000 U.S. public companies. And, even among adopters, the prevalent transition method is prospective, not retroactive.
Other poor choices perpetuated and expanded off-balance sheet financing ploys, virtually all of which involve spending shareholders' money to keep information from them. So, when you're wondering why you have to comply with SOX, consider leases and how you (or people you know) maneuvered deals with terms just below the cutoffs for capitalization.
Maybe you didn't engage in options, leasing or other forms of reporting subterfuge. If so, great - but did you ever speak out or do anything else to confront these maneuvers? When we look at it this way, we see that many in academe are partially to blame for the heavy-handed response of Sarbanes-Oxley. Those who teach students what GAAP is without regard to what it isn't but could and should be are letting down the accounting profession as well as their students.
For no good reason other than self-indulgence, the academy as a whole failed to exercise appropriate vigilance in finding and communicating the shortcomings of GAAP to each new generation of accountants. By doing so, the profession lost one of its best ways to fight stagnation and complacency.
(For what it's worth, we also blame academic accountants for producing a couple of generations of accountants with inadequate ethical backbone to deter the excesses. At some point, it became unfashionable for professors to confront practitioners with the error of their ways. Once again, the SOX compliance effort is payback for a lot of past mistakes.)
Poor auditing choices
It was more than reporting problems that unleashed SOX. Specifically, additional blame can be placed on myopic auditors who became convinced that their only loyalties were to themselves and those who paid their fees, missing the point that their true clients are investors and the public.
One area that was and continues to be a problem is non-audit services provided to audit clients. In the Securities and Exchange Commission's hearings in 2000, four of the Big Five firms staunchly defended providing all sorts of services to their audit clients, steadfastly claiming that they were totally independent. They virtually chanted in unison that they could do "better" audits if they consulted. We asked then, and ask now, "Better for whom?"
There is no need to ask why SOX was passed, or why the Public Company Accounting Oversight Board is contemplating more restrictions on these services. Auditors had a chance to confess, clean up and move on, but they didn't even see it, much less take it. Now they're being forced to.
Poor lobbying choices
We also dismiss any claims of innocence coming from statement preparers after listening for years to their vociferous, even malicious, lobbying efforts directed at FASB and the SEC whenever they tried to reform GAAP. As an example, we often have to explain pension accounting to our students, but end up describing it as a political mess that placated threats to the board's existence. The same is true for options and countless other standards, because smug power brokers wanted to persist in reporting nothing useful.
Lobbying of a different kind occurred when the PCAOB was being created and powers at the AICPA got the ear of SEC chair Harvey Pitt. At the last minute, they plucked from his grasp the virtually completed nomination of John Biggs as the board's first chair.
Ironically, the foul aroma surrounding this debacle was intensified after Congressman Michael Oxley (yes, the same Oxley) joined the CPAs in pressuring Pitt, who caved in, was exposed and went on to his well-deserved reward of early retirement.
Thus, when you're suffering the agony of compliance, don't ask for whom the SOX bell tolls - it tolls for those who thought (and probably still think) that the best strategy for the future is unleashing political power to keep it like the past.
Lack of leadership
Another theme runs throughout the previous paragraphs, namely that SOX was stimulated by the absence of leadership, especially from large firms and the AICPA. While Rome was burning, Barry Melancon and the institute's powers-that-be were creating CPA2Biz.bomb and trying to replace CPAs with cognitors. We think they were so deep into their own interests that they failed to notice that no one attributed credibility to financial statements and auditing standards.
In case you don't believe us, just observe that the PCAOB now has the authority and responsibility for setting auditing standards and enforcing professional ethics that the AICPA once dominated. Why? Because the people occupying leadership positions didn't answer a higher call, and because those at the bottom didn't rise up in protest. As a result, the institute has sunk into virtual irrelevance where it used to have the biggest stick.
Truth or consequences
So, like the inmate who wasn't finding fulfillment behind bars, people shouldn't expect compliance with SOX to be uplifting, satisfying or economical. More than anything else, the pain and costs are the consequences of failing to live up to the gold standard of dealing in the truth in all we do. After taking its eyes off that goal while holding its palms out for more money, perhaps the accounting profession is getting what it deserves.
So, if you're prone to complain about SOX, do a gut check, learn from this process, make it your goal to do more than is required, and, above all, avoid repeating the mistakes that put us here in the first place. It's time to create a new world that elevates Truth to its rightful place as the reason for accounting's existence.
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