The decade-old act that continues to keep a watchful eye. But is it enough?
The importance of secure internal financial control systems have long been realised by the business community. The Sarbanes-Oxley Act, 2002, named after Senator Paul Sarbanes and Representative Michael Oxley, has, however, shifted the responsibility for this function squarely onto the shoulders of executive management. Not only do they have to establish, evaluate and regularly assess the effectiveness of the internal control system, they also have to assert its effectiveness on a period basis.
The Act has caused revolutionary changes in the regulatory landscape for public companies. Companies that fail to comply with its requirements face serious consequences.
The bill was introduced following a series of accounting and corporate scandals in the US, including those affecting Tyco International, Enron, Peregrine Systems, Adelphia and WorldCom. These scandals resulted in investors losing billions of dollars and seriously undermined public confidence in the country’s security markets.
The Act should not only be seen as a challenge, but also as an opportunity. Rather than simply recognising and accepting the regulatory landscape, companies should start to look at the regular evaluation of internal control over financial reporting, not only as a legal duty, but also as an opportunity to improve the integrity of their corporate performance and financial reporting systems.
Success or failure?
The fact that the Sarbanes-Oxley Act could not prevent subsequent scandals, like Lehman Brothers, where the company used repo deals to generate fake profits on security sales, has caused many people to believe that the Act was actually a failure.
In a March 2010 interview with Representative Oxley, CNN asked him directly whether he thought the law was a success or a failure. He was adamant that, to the extent that the law improved the level of transparency in the USA, it was a success. He quoted the fact that a number of other countries, including Canada, Israel, Japan and the EU have since approved similar legislation as proof that the US was on the right path with the Sarbanes Oxley Act.
Even though public confidence had been seriously hurt by the economic meltdown, he said that the situation could have been much worse if accounting regulations had been as slack as their financial counterparts.
The 2007 Lord & Benoit Report studied close to 2,500 companies and the findings indicated that those with no substantial flaws in their internal controls or those that rectified problems in a timely fashion, experienced substantially larger increase in their share prices than companies that failed to do so. The report also found that the benefits of complying with the Sarbanes-Oxley Act clearly outweighed the additional cost of implementing it.
When PriceWaterhouseCoopers told insurance company AIG its credit valuations were too high and would need a significant write-down, AIG needed to disclose that information in terms of Sarbanes Oxley. This informed the public and protected shareholders, exactly how Congress wanted the law to function.
The largest public companies in the US, which already have established internal control departments, were in the best position to quickly adjust to the Sarbanes Oxley Act.
The chief financial officer at General Electric, Keith Sherin, said, “I’ve been a vocal supporter. We got a benefit out of it; it hasn’t been a burden.”