A decade has passed since legislation took effect and drastically changed the financial reporting rules for public companies.
Debuting after the financial collapses of large companies such as Enron and WorldCom and the downfall of former Big 5 accounting firm Arthur Anderson LLP, the Sarbanes-Oxley Act of 2002, or SOX, was authored by then-U.S. Sen. Paul Sarbanes, D-Maryland,and former Rep. Michael Oxley, R-Ohio.
“It was designed to protect investors, to restore their public confidence, to enhance reliability, transparency, the accountability of financial reporting and improve audit quality. So there are lots of pieces to it, but number one was to protect investors, because they felt like the investors had sort of been duped or misled with some of the issues we had with some of those large companies,” said Cindy Boyle, a partner with BKD LLP, who works out of the Springfield-based firm’s office in Little Rock, Ark. She said the firm provides audits for fewer than 100 public companies but also handles corporate governance services for many others.
Accountability and transparencyFor public companies, Boyle said Section 404 of the law is one of the most onerous provisions because it mandates that companies must establish and maintain strong internal controls. As a result, companies are required to document and test their internal control systems against established frameworks, including the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, which was established several years prior to the SOX legislation. COSO defined internal controls, and those definitions influenced some components of SOX, Boyle said.
BKD has helped several companies with Section 404 requirements.
“In most every case, we have found areas of improvement for them to strengthen their controls – in some instances, because their controls were not functioning as they intended and in others because there was an actual gap in their system of controls,” Boyle said, noting that some companies need help with mitigating risk as well as streamlining SOX requirements with other regulations such as through the Health Insurance Portability and Accountability Act.
One component of the law stipulates that companies disclose a broader range of financial details, and requires top-level executives – CEOs and chief financial officers – to certify financial reports. While the law aims to make the executives more accountable, it also enables them to be more informed about company finances and operations.
“The accountability part was put in to say that CEOs and CFOs of these public companies – their names are on the line as responsible for these financial statements,” Boyle said. “They can’t say, ‘Oh, gosh, I didn’t know what was going on. I don’t look at the accounting stuff. That’s my accounting person.’”
The law also requires public companies to have audit committees with not only company management representatives but also independent members and at least one person qualified as a financial expert, Boyle said.
Great Southern Bancorp Inc. (Nasdaq:GSBC), the holding company for Great Southern Bank, has been a publicly traded company since 1989, said bank spokeswoman Kelly Polonus.
While the bank did have to do some up-front work for compliance when SOX first took effect, she said regulations are a familiar fact of doing business for financial institutions, so the impact for the bank was less than it might have been for other companies.
“We integrated it into all of our compliance procedures (and) it just became part of everyday business, complying with SOX procedures as well as all the other financial regulations that we comply with,” Polonus said.
Division of workOther components of the law affect accounting firms that work with public companies, including prohibiting much crossover between audits and other services for the same client companies.
“If we perform the audit of a company, we cannot do certain other nonaudit services, such as internal audit management functions of any sort, bookkeeping – there’s a laundry list,” Boyle said. “Anything we were to do outside the audit has to be preapproved by the audit committee, so that it’s totally transparent and everyone knows who’s (doing) what.”
And while firms don’t have to rotate, the partner handling a company’s audits has to rotate every five years to help maintain objective independence.
SOX also created the Public Company Accounting Oversight Board. Firms such as BKD that handle accounting and audits for public companies must be registered, and their audits of such companies must undergo inspection by the board, Boyle said.
Examining the effects Boyle said she believes SOX has gone a long way in protecting investors, enhancing reporting and improving audit quality, though she said debate is ongoing about the effects of the law, to which there have been some amendments and exemptions through the years.
In 2010, for example, the Dodd-Frank Act exempted some smaller public companies, classified as nonaccelerated filers, from some requirements, and earlier this year, the passage of the Jumpstart Our Business Startups, or JOBS Act, brought exemptions for emerging growth companies.
“The reason is that it did cost companies a lot of money, especially when SOX first came out, to become compliant,” Boyle said. “In the JOBS Act, they are exempt, for a period of time, from complying with Section 404.”
While proponents of SOX think exemptions water down the bill’s intent, opponents of the legislation – even 10 years later – worry that the law has diminished competitive advantages for U.S. companies and caused a reduction in initial public offerings nationwide.
It can be difficult, however, to pinpoint a single reason for ups and downs in IPO volumes, Boyle said, because the economic conditions, as well as legislative changes, could affect volumes.
There’s also the old saying that imitation is the sincerest form of flattery, and if that’s the case, it may be that competitive disadvantage concerns are unfounded, as Boyle noted several other countries have implemented provisions similar to SOX, and some private companies have adopted SOX provisions.
The Institute of Internal Auditors, an advocacy and education group with more than 175,000 members worldwide, issued written testimony on the impact of SOX legislation in July as part of a U.S. House of Representatives Hearing about the 10th anniversary of the act. The hearing was sponsored by the House Committee on Financial Services’ Subcommittee on Capital Markets. IIA testimony indicated that SOX “brought key financial reporting matters to the forefront of corporate consciousness and have resulted in meaningful improvement in the disciplines associated with the integrity of reported financial data and related operating results,” according to
TheIIA.org. In its remarks, the organization also indicated willingness to be an active participant in ongoing discussions about changes to the law and its regulations.[[In-content Ad]]
