The Sarbanes-Oxley Act, or SOX, is a bipartisan law introduced in 2002 by then U.S. Senators Paul Sarbanes and Michael Oxley, which came about as a direct result of multiple high-profile corporate and accounting scandals involving financial statement fraud in the early 2000s. The almost simultaneous collapse of Global Crossing, WorldCom and, perhaps most notoriously, Enron (though WorldCom’s asset loss was actually steeper1) created unprecedented market volatility and shook the foundation of the U.S. financial system and investor confidence.
These collapses were instrumental in demonstrating the importance of maintaining timely, relevant regulatory standards and preserving the independence of the accounting professionals responsible for auditing corporate financial reports. As such, the chief goal of SOX was to enact an overhaul of accounting, auditing and corporate financial reporting requirements. Most notably, it created the Public Company Accounting Oversight Board (PCAOB), set forth new responsibilities for the independent audit committee and expanded requirements for public company auditors to further ensure reporting integrity2.
“In the US, standard setters including the SEC, PCAOB and AICPA have robust rules around auditor independence,” Shawn Gilbert, National Partner in Charge, Independence at KPMG, stated in a recent Center for Audit Quality (CAQ) panel. “All of that was strengthened back in the early 2000s with the advent of the Sarbanes-Oxley Act. In the SEC’s rules, they require large audit firms to have a system of quality control that describes the baseline of what that system of quality control should contain3.”
Indeed, the effectiveness of SOX is undeniable as Barron’s reports, it has led to vast improvements in the transparency of publicly traded companies, financial reporting, executive accountability, disclosure rules and board independence. Perhaps what demonstrates this most clearly, however, is the absence of any financial and accounting scandals like those which spurred the introduction of SOX throughout the 20 years since its inception4.
Moving forward, however, a CAQ report published by CFO Dive notes the challenges inherent in an increasingly complex financial reporting ecosystem. In order to maintain effective guidance and auditor independence, the PCAOB and other industry regulators will need to ensure that standards keep pace with innovations, such as artificial intelligence, and evolving financial reporting sectors, like sustainability accounting.
“Regulators should regularly evaluate if rules are fit for purpose and there should be amendments to rules when the business environment changes so substantially as to affect the efficacy of the rules that govern independence,” says Vanessa Teitelbaum, Senior Director at the CAQ. “These rules benefit all stakeholders in the corporate reporting ecosystem by establishing trust in the information provided and clear directions on the appropriate relationship between auditors and the companies they review2.”
References:
- “Largest Bankruptcies in the United States as of December 2021…” Statista. 2022. Accessed on 07 Jul. 2022.
- “With the 20th Anniversary of the Landmark Sarbanes Oxley Act…” CFO Dive. 06 Jun. 2022. Accessed on 07 Jul. 2022.
- Video: “Auditor Independence: A Cornerstone of Audit Quality.” Center for Audit Quality. 2022. Accessed on 07 Jul. 2022.
- Peregrine, Michael W. “Corporate Scandal Never Goes Out of Style.” Barron’s. 3 Jun. 2022. Accessed on 7 Jul. 2022.