In the wake of corporate scandals in the United States over the past two years, many reforms have been made. The most significant of these so far is a newly-enacted law, the Sarbanes-Oxley Act of 2002. What changes has this act brought to America? What effects have these changes had on the country? To begin with, it is necessary to understand that the Sarbanes-Oxley Act of 2002 was designed and enacted to prevent deceptive accounting and management practices. Certainly, this is the first and foremost purpose of the law thanks to numerous scandals in such firms as Enron, WorldCom, Arthur Andersen, and many other corporations, accounting firms, and investment banks. Of course, all of these reforms have been created in the hope that they will provide more protection for investors. Thanks to the act, investors, in general, will benefit from more oversight of companies they have entrusted their money to.
The Sarbanes-Oxley Act still empowers the Securities and Exchange Commission (SEC) as the regulator of firms’ activities. It directs the SEC to require publicly-held companies to provide their code of ethics in their annual reports. As a result, a number of companies have begun to offer information on their code of ethics as well as conflict-of-interest policies for corporate officers. The Bush administration has proposed a 2004 budget of $842 million, a 29.5-percent increase from an estimate of $650 million in 2003. To increase its efficiency, the SEC plans to boost its staff by 500 people.
Under this particular act, many reforms target public accounting firms, corporate boards, and Wall Street businesses. To deal with these entities, the new law provides a number of directives. One of last year’s remarkable moves was the creation of a so-called Public Accounting Company Oversight Board. The board is granted subpoena and disciplinary powers, including the ability to revoke the individual or firm’s license to practice. The SEC is to oversee this board, which must include five financial experts to be appointed to five-year terms. It will be funded by fees from public companies and accountants. As for accounting firms, now they are prohibited from offering nine types of consulting services to corporate clients such as legal advice, management, and designing financial-information software. They are also required to rotate lead or review partners from client assignments every five years.
Like accounting firms, public companies also face new and tougher regulations. First, companies are required to state when their earnings announcements do not follow generally accepted accounting practices. In this sector, the new law seeks to impose some regulations on corporate accountants, lawyers, and board members. It mandates that annual and quarterly financial reports must disclose off-balance-sheet transactions and relationships. Also, lawyers are required to report suspected fraud of corporate clients to senior executives or a company’s board. Not less important, the Sarbanes-Oxley Act gives instructions to companies to select independent audit committees from their boards of directors to oversee the audit process.
Wall Street firms also now come under much more pressure from the regulators. For example, the act makes it a crime for any person to corruptly alter, destroy, mutilate, or conceal documents with the intent to impair the object’s integrity or availability for use in an official proceeding or to otherwise obstruct, influence or impede any official proceeding. The punishment would be up to 20 years in prison and a fine.
Speaking of these positive changes that the Act is supposed to bring to corporate America, we also need to know how it is currently and actually being implemented. This process is not without obstacles; in fact, there have been many complaints from both regulators and companies. Over the past several months, the SEC has been struggling to implement the requirements of the act. According to relevant groups, it will take months for the application of the act to evolve properly and its new procedure to be in place. Also, the Public Accounting Company Oversight Board is still without a chairman. Mr. William Weber, the original choice, resigned among questions about the accounting practices at a company where he was a director. Also as a result of the new provisions of the act, many companies now choose to leave out forward-looking statements out of fear that these will come back to haunt them. And for all these reasons, investors still have reasons to watch carefully how these reforms are actually used when a company runs into trouble.