Sarbanes Oxley Turns Five

SOX turns five today, the anniversary of the signing of the law by President Bush.  The anniversary has been followed closely by Audit Trail, with the blog hosting a series of events to celebrate this auspicious anniversary. 

We take a moment to review the history of the remarkable piece of legislation.  In many ways, the adoption was rapid and unexpected.  It was back in 2002, after the demise of Enron.  The House and Senate were toying with the idea of corporate governance reform, but not very seriously. 

The House passed its version of SOX in April 2002.  Although a much different version made it through the Senate Banking Committee a few months later (on June 18), the entire package seemed moribund.  That both bodies would adopt reforms and then reconcile different versions of the reform did not appear likely. 

The reform efforts, however, got a shot in the arm a week later when the massive fraud at Worldcom surfaced.  Congress acted quickly, no doubt spurred in part concerned by the upcoming elections and the need to appear tough on corporate crime.  On July 15, the Senate passed its version by a 97-0 vote, sending the entire matter to conference.  On July 25, the version that emerged from the Conference Committee overwhelmingly passed both chambers, in the Senate by a margin of 99-0 and in the House by a margin of 423-3.  The three negative votes?  Mac Collins (GA), Ron Paul (TX) and Jeff Flake (AZ).  Ron Paul is currently a candidate for president and remains an implacable foe of SOX. 

Five days later, on July 30, President Bush signed the bill into law.  Sarbanes-Oxley, a bill dead in the water only a month or two before, became law. 

The Act is now five years old.  We will have more to say over the week about its impact.  What we can say is this.  The Act, although imperfect, went a long way to ending the culture of the imperial CEO.  The Act made the outside auditors more independent, empowered the audit committee of the board of directors, and gave the CFO the incentive to disagree with the CEO (the incentive being a possible 20 year prison sentence).  It is this more than anything else that has altered the way public companies are managed and, from the upward trajectory of the Dow Jones Average (the last two trading days excepted), enhanced the confidence of investors.