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SarbOx creation to protect investors interest in Financial dealings

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published January 03, 2005

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( 38 votes, average: 4.5 out of 5)
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The act was named after its main authors, Senator Paul Sarbanes and Representative Michael Oxley. It was drafted and enacted in large part because of a series of high-profile corporate scandals, most notably the Enron episode.

The Sarbanes-Oxley Act (SarbOx) introduced significant changes to corporate governance and disclosure regulations. More specifically, SarbOx promulgated stringent rules designed, according to the act's introduction, ''to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.'' By almost all accounts, those changes in the law were dramatic. According to Giovanni P. Prezioso, General Counsel of the U.S. Securities & Exchange Commission (SEC), ''The Sarbanes-Oxley Act of 2002 has given us the most sweeping new securities legislation since the 1930s.''

But has that sweeping legislation been effective or achieved the goals it was enacted to address? According to some observers, the act's origins and knee-jerk responsiveness to corporate fraud is partly responsible for some of its more problematic effects.

''Sarbanes-Oxley was a political response to serious breaches in honesty and fiduciary responsibility,'' commented Luis A. Aguilar, a Partner with Alston & Bird who specializes in securities and corporate governance work. ''As a political response, I think it was quickly and hastily done to address public confidence issues. Although there's some good stuff in there, there's also some additional burdensome cost imposed on corporate America. I'm not sure the cost benefit analysis has balanced out.''

''Clearly people have concerns right now about the effect of Sarbanes-Oxley,'' commented Gary Nelson, Executive Vice President, General Counsel & Corporate Secretary of Ceridian Corporation. ''The primary purpose of Sarbanes-Oxley and related rules is to deter people from illegal or inappropriate conduct-the financial and other fraud that has occurred at Enron, MCI, Tyco, and other places. They want to deter other companies, so they're tightening the rules. That's fine, but sometimes it makes people afraid to exercise judgment or discretion in areas where they historically have and still should.''

Some analysts have also pointed to the increased liability issues of the act. In fact, while SarbOx would appear to be a partial boon to accounting and law firms, conversations with some of these professionals continue to support the 'mixed blessing' nature of the act. On the one hand, the act's requirements have increased the workload; on the other they've increased liability.

Some of the securities reporting and corporate governance work the act changed (or augmented), leading to the increased work-particularly for in-house counsel-include:
  • CEO and CFO certification of the financial condition of their company as it is stated in periodic SEC reports. As you can imagine, those certifications have increased the level of scrutiny for the auditors, accountants, and lawyers responsible for compiling SEC reports, and for making sure they rise to the level of supporting a chief executive's certification and signature. Increased scrutiny means more time spent poring over company financials and management and business descriptions.
  • Accelerated filing deadlines for periodic reports, including, for example, insider transactions involving the company's stock. The raised tempo of filing deadlines also ramps up the accounting and legal work required to compile the reports.
  • SarbOx also calls for increased corporate governance documentation and related requirements for the board, company executives, and company employees. For example, the act calls for increased review of audit committee processes and procedures, including the requirement that committee members meet the definition of ''Audit Committee Financial Expert,'' i.e., they are knowledgeable and qualified to review company financial matters. It also requires the creation and adoption of Charters for the Company's Audit Committee, Corporate Governance Committee, and Nominating Committee.
  • Public companies must also create and adopt a Code of Ethics for the CEO and other senior officers. Similarly, they have to set in place procedures regarding the duty of attorneys to report evidence of material violation of securities laws.
All of the preceding have resulted in a definite increase in the burden required to comply-particularly for those professionals residing in-house.

Another hidden, unexpected SarbOx result has been the need for companies to increase the size of their accounting and/or legal staffs, which has resulted in an increase in the non-revenue-producing overhead of corporate America and a drain on some accounting and law firm personnel resources.

''Some of our best people have been lured away to cush corporate jobs,'' commented one auditor from a large accounting firm.

Admittedly, no one feels SarbOx has resulted in an easier reporting or corporate governance environment. But, as previously noted, the primary reasons for passage of the act had everything to do with Enron and related corporate scandals in which the existing securities laws failed to catch fraudulent reporting activities that netted millions for their perpetrators-at least until they were caught.

So have Sarbanes-Oxley's increased regulatory requirements resulted in a corporate environment in which less fraud is occurring, or in which-if it does-its perpetrators are getting caught? Since July 30, 2002, the number of SEC prosecutions has definitely risen. And judging from some of the newsworthy corporate scandals that have occurred, it seems the act is providing the SEC with the wherewithal to remedy some of Corporate America's more egregious offenses.

In fact, according to Alan L. Beller, Director, Division of Corporation Finance for the SEC, ''Last year the [Securities & Exchange] Commission brought 679 cases, of which 199 involved financial fraud or reporting deficiencies.'' Director Beller was speaking at the 58th National Conference of the American Society of Corporate Secretaries on July 10, 2004. Part of his speech involved reviewing the impact of Sarbanes Oxley ''two years later.'' Continuing to describe some of that impact, Beller said, ''The Commission has obtained orders for penalties and disgorgements totaling $2.2 billion as of late June 2004. And between October 2003 and June 2004 the Commission sought 110 officer and director bars.''

In part those numbers demonstrate the act's efficacy. However, in 2002, along with passage of the act, Congress gave the SEC $750 million to increase staff and enforcement capabilities. In some regional SEC offices (e.g., San Francisco), that has translated into an almost 25% jump in the number of lawyers and accountants working in the office. With more investigative professionals and with the increased regulatory authority provided under SarbOx, more cases have been made.

The overall net effect of Sarbanes-Oxley is still being determined. It's safe to say the law, like most, is far from perfect. In-house practitioners and outside counsel involved with corporate governance and securities issues are troubled by some of the act's more draconian requirements. And yet the SEC has been more effective than ever, discovering-as President Bush had hoped-''corporate fraud and corruption'' and prosecuting ''wrongdoers.''

Regardless of your perspective, the Sarbanes-Oxley Act is the current law of the land. In time it may be amended and improved. But for now, if you're an in-house practitioner, there's simply no escaping it-your job is more complicated, and your burden has gotten heavier.
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published January 03, 2005

( 38 votes, average: 4.5 out of 5)
What do you think about this article? Rate it using the stars above and let us know what you think in the comments below.

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