On the occasion of the 10th anniversary of the Sarbanes-Oxley (SOX) Act, professors, CEOs, and financial executives told a congressional hearing today that while the law took effect in qualitative goals like restoring investor confidence, measuring its success a decade later requires a bit more quantitative thought.
SOX achieved notoriety for mandating that CEOs and CFOs personally sign off on the accuracy of their financial reporting and for contributing to a drop in restatements of company financials. It also required each public company’s independent auditor to attest to the disclosures management made, and it enhanced auditor independence overall.
But more cost-benefit analysis is needed to make sure SOX is still useful, those testifying said. For example, the high costs of complying with the law have been debated frequently. Panelists today cited costs running anywhere from $1 million to $2.3 million, though individual companies may pay more or less than that.
However, such compliance costs have declined significantly over the past 10 years, said Michael Gallagher, chairman of the Professional Practice Executive Committee at the Center for Audit Quality and a managing partner at PricewaterhouseCoopers. That’s because of efficiencies that arose as companies and auditors became more familiar with the SOX requirements, as well as actions taken by the auditor-oversight body created by SOX, the Public Company Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission.
Also, because of SOX, boards of directors were required to have at least one financial expert on the audit committee or else explain in the proxy statement why that wasn’t done. These actions helped audit committees’ work to improve both company financial reporting and audit quality over the years, according to Gallagher.
Although the panelists were not sure whether further changes to audit processes are necessary, they said they would be more definitive on whether to support the PCAOB’s recent proposal for mandatory rotation of a company’s auditor if they had a better idea of the costs involved.
Columbia University Law School professor John Coffee testified that he needs a “thorough cost-benefit study in order to support the proposal.” He further noted that if the PCAOB went forward with the idea without such an analysis, the oversight board would be subject to judicial review.
Gallagher was more emphatically against the mandatory-rotation concept. “There has never been any linkage between (audit) tenure and a negative impact on audit quality. In fact, if anything, history tells us otherwise,” he said.