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SOX: 'An appropriate response'

By Bill Sheridan
MACPA E-Communications Manager

It has its flaws, to be sure, and there are still as many questions as answers. But nearly two years after it was signed into law, the Sarbanes-Oxley Act is doing what it was intended to do.

That's the opinion of three accounting insiders — one of whom helped draft the act — who took part in a recent Loyola College panel discussion about the impact Sarbanes-Oxley has had on the profession.

The panelists offered diverse views from different corners of the accounting reform world. They included:

• Bruce Arensmeier, a managing partner for Deloitte & Touche in Baltimore who has more than 17 years of public accounting experience;
• James Brady, who directs a management consulting firm and sits on four boards of directors; and
• Michael Paese, a former senior counsel to the U.S. House of Representatives' Financial Services Committee who helped draft portions of the Sarbanes-Oxley Act.

Differing backgrounds aside, each put forth a similar message: For all of its questions, costs and confusion, Sarbanes-Oxley is working.

"By and large, Sarbanes-Oxley is an appropriate response to a real problem," said Brady. "It is a very costly law to small and big companies alike, and a lot of companies are devoting a lot of time to (complying with) it. But it's time well spent."

Improved corporate governance

Brady, managing director of Ballantrae International's Mid-Atlantic office, serves on the boards of directors and audit committees at Constellation Energy Group, McCormick & Company, T. Rowe Price Group and Aether Systems. Since Sarbanes-Oxley's implementation in July 2002, he has seen a marked change in the way audit committees, boards of directors and corporate management conduct their business — all for the better.

Chief among that change, he says, is an enhanced system of corporate governance that emphasizes personal responsibility. Audit committees now are giving a lot of attention to "risk management" — identifying risks and those responsible for mitigating them — and the roles and responsibilities of boards and audit committees are clearer now than ever before.

"You might say, 'Audit committees and boards of directors have been around forever — do you mean they didn't know what their jobs were (before Sarbanes-Oxley)?' In a lot of cases, that was the case," Brady said.

Paese, who helped draft the House (or "Oxley") version of the act before taking a job as deputy general counsel at Mercantile Bankshares, said boards of directors today are "radically different" than they used to be for one reason: They understand the importance of their role within a public company.

"There are a lot of costs involved in rebuilding the (corporate governance) system, no doubt. But are boards taking themselves more seriously? Yes. Are cultural changes taking place? I think so," Paese said. "At the end of the day, I think this bill is working. We're struggling with a lot of issues, but corporate governance is getting better."

The balance of corporate power is shifting, too. In years past, an auditor's questions about a company's numbers might have fallen on deaf ears. And now? "If an auditor goes to an audit committee today and says, 'That's not right,' you tell me who the audit committee is going to support — the auditor or management," Paese said.

Arensmeier, who has been in the auditing business for nearly two decades, agreed.

"The relationship between the audit committee and the auditor is definitely improving," he said. "As an auditor, I feel that people are finally listening to what I have to say."

Auditors have benefited from Sarbanes-Oxley in other ways, as well. For one, they have as much work as they can handle — not always the work they want to be doing, Arensmeier said, but a lot of work nonetheless.

For another, Arensmeier said auditors are enjoying a renaissance of sorts. His worst fear — that Sarbanes-Oxley would have turned auditing into a government function — didn't come true.

"Instead, (the government) said that auditors have a very important role to play in our capital markets," Arensmeier said. "That made me feel good about what I do every day."

Questions remain

Implementing Sarbanes-Oxley hasn't been entirely smooth sailing, though. One of the biggest concerns centers on Section 404. This controversial provision requires that each public company establish and maintain an "adequate" internal control structure and assess the effectiveness of such internal controls in its annual report.

Paese questioned the necessity of Section 404. He says the attestation issue may have been adequately addressed in Section 302, which requires a CEO and CFO to certify that their financial statements offer a fair look the company's financial condition.

"Once you change the relationship between the auditor and the board and make management responsible for a number of things, to overlay on top of that a whole paper trail of internal controls is, I've always thought, a little extensive," Paese said. "I'm not sure that it's not overly burdensome."

Brady agreed — with a caveat.

"(Section 404) is a huge effort," he said. "The argument can be made that its ultimate benefit might not equal the cost of doing it. However, an argument also can be made that there is real value coming out of that process."

Also unclear is the ultimate role of the Public Company Accounting Oversight Board. Paese said the PCAOB needs more staff and time before anyone will know if it is effective.

"The auditing of public accounting firms is an entirely new concept," he said. "(The PCAOB) simply is not up and running yet. The board is going to have to audit public firms for at least two years before we know whether or not it works."

Still, Brady is hopeful.

"I've talked to several (PCAOB) members and they are serious about doing something meaningful," he said. "A lot is going to happen. The accounting profession has to understand that things have to change."

And they are changing, mostly for the better. Paese, who says Sarbanes-Oxley is the most sweeping change the profession has seen since the securities acts of 1933 and 1934, says the reforms have been "80 percent effective." And that's a start.

Much of the rest, Brady said, is up to the profession.

"I'm a free-market person. I don't believe the government has the wisdom to inject itself into every situation," Brady said. "But Sarbanes-Oxley is not like every situation. The credibility of the markets had been compromised. If there is anything worse than that, I don't know what it is.

"It's not useful for companies to whine about (Sarbanes-Oxley)," he added. "Rather, we should ask ourselves, 'How do we extract maximum value from it?' I think companies are coming to that point of view."

And when all else fails, look at it this way:

"I've been in public accounting for 17 years," Arensmeier said, "and this is the first time that my mom and dad understand what I do. I think that's a good thing."