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In response to the Enron bankruptcy and other accounting and corporate governance scandals (e.g., Tyco International, Adelphia), Congress began working on a corporate governance billthe Sarbanes-Oxley Act (SOX), which it rushed to pass after WorldCom filed for bankruptcy in July 2002. Prior to this, the bill's passage was far from certain; the House of Representatives and the Senate were in different stages of passing proposals that substantially differed and that faced significant opposition from lobbyists and trade groups representing accounting and business interests. But after the WorldCom scandal, "everyone in Washington wanted to do something-anything-to show they were cracking down on corporate fraud" (Joseph Nocera, "For All Its Costs, Sarbanes Law Is Working," New York Times, Dec. 3, 2005, p. 1).
And crack down they did: SOX has been described as the most sweeping federal legislation concerning corporate governance since the Securities Act of 1933 and the Securities Exchange Act of 1934. But given the law's hurried passage and broad scope, critics have charged that it has had unintended consequences and that its costs exceed its benefits. Now that CPAs have had a decade of experience with SOX, it is useful to review several metrics in order to determine whether the act's touted benefits have materialized.
Review of Objectives
SOX aimed to make financial reporting more transparent and to restore investor confidence in the U.S. financial markets. Specifically, its objectives included the following:
* Enhance auditor independence, primarily by restricting the nonaudit services that a CPA firm may provide to its audit clients and by requiring audit-partner rotation.
* Address concerns about the auditing profession's self-regulation by creating the PCAOB and charging it with regulating the profession and establishing standards.
* Improve corporate governance and, as a result, reduce (ideally, eliminate) fraudulent financial reporting. SOX approached this aim by requiring executives to certify financial reports and internal controls; providing for SEC rules that prohibit fraudulently influencing or misleading auditors; requiring attorneys to report evidence of fraud; requiring disclosures regarding the internal control structure and code of ethics for financial officers; and protecting whistleblowers, with significant penalties for noncompliance with SOX's various requirements.
Criticisms of SOX
The following sections discuss several criticisms of the act:
Scope. Some refer to SOX as the toughest piece of corporate...