As the 10-year anniversary of the Sarbanes-Oxley Act rolled around this week, a re-evaluation is underway of SOX’s sometimes controversial legacy.
Passed in the wake of the Enron and WorldCom financial scandals, Sarbanes-Oxley ushered in a wave of auditing reforms, including audits of internal controls in Section 404 of the bill.
“There were problems initially with Section 404,” said Trent Gazzaway, managing partner of audit services at Grant Thornton. “Auditors had trouble auditing internal controls. There was a steep learning curve, both on the company’s information side and on the audit side. We saw over time the entire professional auditing profession learning lessons, and the extra cost of SOX 404 has virtually evaporated. I don’t think the marketplace recognizes that as much.”
While the initial implementation of a Section 404 audit of internal controls was initially costly for companies, most companies have benefited from being able to tell the investing public that they have properly audited their controls. Nevertheless, Gazzaway believes that the relentless assault on Sarbanes-Oxley has continued to this day, with lobbying efforts continuing in Congress to weaken the law.
“The benefits as shown in study after study have been pretty significant,” said Gazzaway. “Companies that comply with Sarbanes-Oxley 404 have fewer restatements.”
Earlier this year, Congress passed the JOBS Act, which weakened a number of audit and investor protections for smaller companies seeking to go public. Gazzaway has mixed feelings about the law, noting that Grant Thornton had supported an early version of the JOBS Act because it promises to give smaller companies access to the capital markets. However, some amendments were later added to the bill, such as a longer “IPO on-ramp” before outside audits of internal controls are required of so-called “emerging growth companies,” and these are more problematic.
“The problem is the lobbying efforts didn’t stop there,” said Gazzaway. “There is still a lot of effort out there to repeal 404 in its entirety.”
Despite those efforts, Gazzaway believes Sarbanes-Oxley succeeded in raising the profile of the audit committee and improving the audit committee's quality and communication with auditors. “That has helped improve the audit process overall,” he said.