The Sarbanes-Oxley Act: Beneficial or limiting?

Beneficial

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by Jack Roviere

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The Sarbanes-Oxley Act has threatened and limited the employment opportunities of corporate and audit professionals substantially since 2002. After all, why shouldn't auditors be allowed to also consult the corporations they audit? Can't an accountant make an honest buck without Uncle Sam reaching in to mess things up?

...Obviously, this scenario is precisely just one of the rampant problems of the pre-Sarbanes-Oxley world. The Sarbanes-Oxley Act has been one of the most successful and sweeping reform laws to re-establish equity, professionalism and prestige to the accounting and auditing world. Sarbanes-Oxley, or Sarbox, was passed by overwhelming majorities in both houses to counteract and prevent any future scams like the massive corporate scams perpetuated by Enron, Tyco International, and Worldcom (just to name a few of the most noticeable ones.)

One might think: shouldn't there be a watchdog entity that makes sure companies aren't falsifying financial data or conducting bogus transactions to make itself look healthier to investors? The problem of the pre-Sarbox world was that there were such entities - auditors from companies such as Arthur Andersen - the only problem was that the law at the time didn't regulate well enough the activities that such auditors could or couldn't do. The way large accounting firms were designed (and still are designed, in a way, today) allowed one firm to do many different financial features: a firm would have departments for auditing financial information to ensure its truthfulness to investors, for consulting corporations to improve any business inefficiencies based on internal or external financial documents, and maybe departments based on lowering the company's tax profile.

Many times, the same auditing firm would be consulting a corporation as would be consulting. It was a conflict of interest that the pre-Sarbox law was blind too - although today, most people can easily see that it's hard to be unbiased to a company whose financial stake could essentially be sustained or hacked away by a good or bad quarterly earnings showing when they are also paying your staff, this obvious sight escaped those at some accounting firms, Enron, and other corporations.

After the crash of several such companies (and the dissolution of one of the "Big 5" accounting firms - the previously mentioned Arthur Andersen - then came the reform, the Sarbanes-Oxley. It took a look at several of the obvious and avoidable wrongdoings of several of the most recent fraud cases. It then established that (among other regulations):

1) There should be a new Public Company Accounting Oversight Board whose sole duty was to regulate and independently oversee "public" entities such as auditors and their processes.

2) Auditors must be independent (limiting the actions that active auditors could perform with companies) to limit conflict of interests.

3) Senior executives (primarily the CEO and CFO) from corporations must take responsibilities for financial information produced through the company.

4) Corporations had to better report "off-balance sheet" transactions.

5) Securities analysts, like auditors, must disclose any potential conflicts of interest to the public.

6) The SEC must censure or bar securities professionals from practices that would create conflict of interests.

...A whole lot of rules, and that's not even all of them. It's easy to think that Sarbox was simply a government bureaucracy's attempt to look good after the fact (millions in investor dollars were simply lost after the many scams) and that the industry was actually harmed by such bureaucratic red tape.

However, beyond limiting the potential for any such drastic frauds like that of Enron (a definite benefit), the Sarbox is beneficial because it has restored credibility to the securities, accounting, and auditing industries (even if it can't help the financial services industry in the wake of the mortgage crisis). Even though it has limited direct opportunities for auditors to simultaneously multitask jobs, it has actually increased the need for accountants and auditors in America, while making the benefits and wages for certified public accountants much more lucrative.

As the last few years can attest to, the Sarbox has clearly paid for itself.

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