The Accounting Industry 10 Years After Sarbanes Oxley
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Table of contents
February 25, 2025

The Accounting Industry 10 Years After Sarbanes Oxley

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Accounting Industry 10 Years After Sarbanes Oxley
There are some who do not share the same fondness as many accounting professionals and organizations do of Sarbanes-Oxley's successes.

The erosion of investor confidence in the wake of accounting scandals at WorldCom, Enron and Tyco led to congressional passage of the Sarbanes-Oxley Act of 2002. Generally, the goal of the law was to make improvements to the quality of audits and the independence of accounting firms. With strict reforms to financial disclosures by corporations, investors could be protected from fraudulent activities. In essence, Sarbanes-Oxley, which is commonly known as SOX, put an end to over 100 years of self-regulating accounting practices.

How SOX Changed the Accounting Industry

Among changing practices for accounting professionals, SOX also led to the creation of a nonprofit organization charged with overseeing outside audits of publically-traded companies. Known as the Public Company Accounting Oversight Board, this satisfies the law's provision that subjects company auditors to external oversight. An amendment to the law occurred with the passage of Dodd-Frank in 2010, which provided funding for the board through accounting support fees.

Additionally, Sarbanes-Oxley made provisions for audit partner rotation and auditor independence. Public companies had to establish internal controls and a reporting system of the sufficiency of the controls. Further, senior executives had to personally certify that financial statements were accurate.

Many considered the latter the crown jewel of Sarbanes-Oxley because of the lack of accountability after the financial scandals. With this requirement, the tone for responsibility was set at the top and trickled down to the accounting staff. Better corporate governance occurred when CEOs sealed the accuracy of the company's financial standing with their signature.

For many stakeholders and accounting professionals, requirements for auditor independence and audit quality have been strengthened since the law's passage. The Act has successfully achieved many objectives that set new standards for corporate governance. Generally, the Public Company Accounting Oversight Board has helped to address issues created by a self-regulating industry that was open to making grave mistakes. Even if problems occurred before the PCAOB, there were no adverse consequences for accounting firms.

Improvements have not simply stopped at fulfilling requirements of the law. As a whole, the accounting profession has proactively built upon the reforms in SOX. Many have enhanced reporting and audit practices that encourage investor protection.

The View from Opponents of Sarbanes-Oxley

There are some who do not share the same fondness as many accounting professionals and organizations do of Sarbanes-Oxley's successes.

Part of the internal control mandate requires compliance costs for public companies that can be steep. For some, the average annual cost burden is significantly higher than original estimates by the SEC. Even some smaller companies, based on assets, are paying seven times more than what larger companies must pay. Still, initial costs have declined since 2002 for most companies.

Nevertheless, opponents want Congress to eliminate this and other burdensome requirements for all public companies.

Learning from History

A slew of corporate scandals precipitated the need for Sarbanes-Oxley over 10 years ago to address systemic flaws. Corporations had eased into the comfort of financial reporting for decades prior to passage of the law. The law sought to change practices that were bad for investors and bad for the economy.

However, no one expected Sarbanes-Oxley to be an instant fix; 10 years later, new financial woes are proving that point. Practically speaking, these are just rules and legislators cannot mandate integrity within corporations. Just as law enforcement cannot stop a thief from robbing a bank, lawmakers cannot stop corporate crooks from stealing from investors. What can occur is a structured set of controls and consequences when the law is not followed.

Letting down guards is certainly not the answer as the lessons of recent years remain fresh in the investment and accounting worlds. The fundamental principles of objectivity, accountability and auditor independence provide value to the accounting industry. Safeguarding the positive differences is necessary to avoid repeating a negative history.

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