As former Enron senior executives Kenneth Lay and Jeffrey Skilling came to trial this month, the Sarbanes-Oxley Act itself has come under scrutiny. At a hearing of a US Senate Committee focusing on accounting and regulatory standards, Paul Sarbanes defended the report he co-authored, arguing that good corporate governance practice was profitable as well as ethical.
Sarbanes cited a report of 2,500 international companies which showed that the implementation of the Sarbanes-Oxley Act had led to a 10% improvement in their relative share price performance.
Sarbanes commented: ?We have been reminded during the past year that non-US companies are not immune from Enron-like breakdowns. Large public companies in Italy (Parmalat), the UK (Shell), the Netherlands (Shell) and Canada (Norton and Hollinger), most of which are listed in the US, are now faced with evidence of poor internal controls, weak corporate governance, and substantial audit failures.?
He claimed that strong internal controls guarded against corruption and fraud by producing the verified information without which the ?gatekeepers? ? such as independent board members ? cannot do their jobs.
Douglas Flint, group finance director at HSBC, was more guarded about the benefits brought about by the Act. He admitted to the hearing that Sarbanes-Oxley had been a ?wake-up call across the world?, reminding boards of ?their responsibilities and their accountability for the accuracy of public reporting.?
He complained, however, that the guidance of the Public Company Accounting Oversight Board (PCAOB) had led to the Act being implemented in a ?meticulously prescriptive? way as accountants became increasingly fearful of the threat of litigation. The danger, he said, was that ?the process becomes the objective rather than the means to the end.?
He also claimed that Sarbanes-Oxley was ?being interpreted to mean or require all manner of things ? and there is no-one who can challenge an interpretation with confidence.?
Sarbanes-Oxley does confer ultimate authority on the auditors as they have to report independently on the company’s financial reporting controls. Flint was concerned, however, that auditor concern about the strength of those controls might discourage directors from making profitable acquisitions.
It seems that all agree on the need for more effective reporting controls in the wake of scandals. How such controls are implemented remains a point of some contention.
