Sarbox! Sounds like a science fiction warrior–Sarbox looked across the valley of mutants and gripped his tekbar laser sword tightly, ready to lead his small band against the scourge of Junoian invaders…
Sarbox! Is it a new prescription drug? Reduces eczema and weakened spine. May cause dizziness, drowsiness, and uncontrollable twitching.
The Sarbanes-Oxley Act of 2002, enacted in the wake of a series of massive corporate scandals, mandated improvement in corporate governance for publicly-held companies. It required improved internal controls, enhanced financial disclosures, independent auditors, and stiffer penalties for violations. Public corporations hated it, especially the ones who were fiddling their books.
Robber Barons Redux (why it was created)
You may recall that near the end of the 1800s, robber barons controlled the railroads, oil companies, and banks. Vanderbilt, Carnegie, and Rockefeller are known today for the buildings and charities they founded with their ill-gotten gains, but at the time they strangled competition, held monopolies over resources, and kept prices high by artificially reducing supply. The Sherman Antitrust Act and various other laws were passed between the 1890s and 1900s to curb such activity.
You may recall that near the end of the 1920s, companies operated in a fairly unregulated environment, leading to misstated financials, over-inflated stocks, and the collapse of the banking system… hence, the creation of GAAP (see letter “G”) as well as the Glass-Steagall Act of 1933.
You may recall… I mean, fercrissake do we never learn? — that in 2001, there were massive public corporation collapses due to financial scandals: Enron, Worldcom, and Tyco whose “…former CEO and CFO were convicted of stealing hundreds of millions of dollars from the company and falsifying business records…” The thefts were getting monotonous.
Enter Congressman Mike Oxley and Paul Sarbanes.
The Bare Minimum of Internal Controls (what SarbOx/SOX does)
The Sarbanes-Oxley Act of 2002 was championed by two gentleman of opposite parties and opposite sides of Congress. Mike Oxley of Ohio was a former FBI agent who had a passion for rooting out banking fraud. After leaving politics, he even lobbied for the Financial Industry Regulatory Authority–what a fun retirement! Paul Sarbanes of Maryland was a Rhodes scholar and Harvard-trained lawyer who served in politics for decades. He helped draft the articles of impeachment against Richard Nixon and, in addition, to focusing on corporate financial reform, was a frequent critic of wasteful spending the military budget.
Maybe it took billions of dollars of fraud and the loss of people’s life-savings for legislation to become enacted. Maybe it took these two old guard white guys to push forward the need for improved financial controls. The Bush Era was known for more for deregulation then helping compliance, but the 2002 passage of SOX was a brief and shining moment for people who prefer their financials to be accurate and complete.
The act itself is comprehensive, with eleven sections covering responsibilities of the board, the auditors, internal compliance, and penalties. It also beefed up whistleblower protection and “clawback” of executive compensation.
Public corporations, of course, hated it.
The Hue and Cry of Overreaction
Generally speaking, companies didn’t like spending money to improve their internal controls and don’t like having more outside auditors looking at their books. (I was a compliance officer and even I didn’t like outside compliance officers looking at our stuff.) Executives complained that the egregious frauds from just a few evil doers shouldn’t cause the entire business world to be turned upside-down.
Companies argued that they would have to go private or move to the U.K. to avoid being listed on the U.S. stock exchanges, now subject to SOX. Or that there would be fewer IPOs. Nearly 20 years later, the jury is out; IPOs were decreasing at the time, anyway, and de-listings have gone up and down.
Meanwhile, a Financial Executives International (FEI) study in 2007, on the other hand, found that investor confidence in companies had significantly improved due to better reporting. Within four years, there had been 1,295 examples of companies restating a material error in their financials.
It’s the ultimate showdown: the wealthy people that run companies vs. the wealthy people that buy company stock. There’s also Truth, Justice, and the American Way to consider, so maybe with SOX, we all win.
Twenty Years Later, Neither a Monster Nor a Panacea
SOX did not prevent the financial scandal of 2008. The collapse of mortgage-backed securities and the banks that supported them wasn’t due to an individual company fiddling their books but industry-wide shady practices. In the first few years after SOX was enacted, compliance costs did soar, and studies done in the 2007-08 time frame found it was costly, but helpful. Kind of like installing traffic lights.
Nearly twenty years later, though, while Sarbanes-Oxley has not been able to eliminate all scandal or financial impropriety, compliance officers are catching it more. Overall, 83% of investors have increased confidence in public company financials.
If anything, SOX is a job creator. Not only has it created new opportunities for auditors, accountants, and compliance officers, but there is SOX software, SOX training, and SOX Checklist Manuals. According to the company ProShred, which helps securely shred massed documents, SOX is integral to your business and theirs.
No one finds it ironic that a shredding company touts its usefulness in supporting Sarbanes-Oxley? Maybe that’s just too much of an in-joke for accountants.