The Fall and Rise of Sarbanes Oxley

It’s almost impossible these days to hear anything positive about Sarbanes-Oxley.

Interestingly, though, the basis for criticizing the Act has shifted. Early on, the criticism centered around process (the lack of deliberation by Congress in passing the legislation). Other attacks focused on the provisions designed to create greater auditor independence (it could impair the effectiveness of audits), on provisions requiring greater director independence (it fixed a non-existent problem), and on the certification process for top officers (it should be optional). The Act was labeled “Quack Corporate Governance” and was criticized for not resulting in the “optimal amount of fraud.” Read more about these critics and a response to them here.

Many of these criticisms have largely disappeared, no doubt in part because public companies didn't agree with them ("The Business Roundtable strongly supported the enactment of the Sarbanes-Oxley Act of 2002"), a view apparently now shared by the President (who announced Wednesday in his State of the Economy speech that "We don't need to change" SOX).

Only the challenges to Section 404 (the requirement that outside auditors “attest” to management’s assessment of the company’s internal controls) and some vague notion that the costs of SOX are the cause of our declining global role in foreign listings and IPOs, remain. Both will be addressed in future posts. Suffice it to say that critics often overstate costs, understate benefits, and deliberately downplayalternative explanations.  

For now, though, it is time to discuss the benefits of SOX, something this Blog will commence on Monday.  If you have some, write a comment and tell us.