Carmen Neghina, Hella Rieger 2008

Content Overview Basic content Pros and Cons PCAOB

Overview

Overview Sarbanes-Oxley Act Public Company Accounting Reform and Investor Protection Act of 2002 SOX or Sarbox Financial practice & corporate governance Senator Paul Sarbanes & Michael Oxley Tremendous pressure on Congress  quick reaction Public company boards, management, public accounting firms

Sarbanes-Oxley Act

Public Company Accounting Reform and Investor Protection Act of 2002

SOX or Sarbox

Financial practice & corporate governance

Senator Paul Sarbanes & Michael Oxley

Tremendous pressure on Congress

 quick reaction

Public company boards, management, public accounting firms

Overview “ The most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt“ Goals: Overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies Auditor independence, internal control assessment, enhanced financial disclosure SOX is aimed at eliminating … … false disclosures … undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers and shareholders

“ The most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt“

Goals:

Overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies

Auditor independence, internal control assessment, enhanced financial disclosure

SOX is aimed at eliminating …

… false disclosures

… undisclosed conflicts of interest between corporations and their analysts, auditors, and attorneys and between corporate directors, officers and shareholders

Content

PCAOB Public Company Accounting Oversight Board Watchdog over accounting firms Five elected members Funding comes from accounting firms, costs vary Adopted three auditing standards in 2004 PCAOB inspects the auditors at least once every three years

Public Company Accounting Oversight Board

Watchdog over accounting firms

Five elected members

Funding comes from accounting firms, costs vary

Adopted three auditing standards in 2004

PCAOB inspects the auditors at least once every three years

Content Public Company Accounting Oversight Board Auditor Independence Corporate Responsibility Enhanced Financial Disclosures Analyst Conflict of Interest Commission Resources and Authority Studies and Reports Corporate and Criminal Fraud Accountability White Collar Crime Penalty Enhancements Corporate Tax Returns Corporate Fraud Accountability

Public Company Accounting Oversight Board

Auditor Independence

Corporate Responsibility

Enhanced Financial Disclosures

Analyst Conflict of Interest

Commission Resources and Authority

Studies and Reports

Corporate and Criminal Fraud Accountability

White Collar Crime Penalty Enhancements

Corporate Tax Returns

Corporate Fraud Accountability

SOX and Corporate Communication State interference Government a larger role in regulating the audit profession Consequences:  the new system has to be communicated to employees  more work (resistance, dissatisfaction)  Employees have to be more controlled, which may lead to a decrease in trust  more information flow among different departments  more transparency  more corporate responsibility

State interference

Government a larger role in regulating the audit profession

Consequences:

 the new system has to be communicated to employees

 more work (resistance, dissatisfaction)

 Employees have to be more controlled, which may lead to a decrease in trust

 more information flow among different departments

 more transparency

 more corporate responsibility

Pros and Cons

Pros Restoring public confidence in capital markets Strengthening corporate accounting controls Standardized key financial processes Elimination of redundant Information Systems Better internal control -> accuracy of information Increased independence between board of directors and management Increased responsibility for financial reporters

Restoring public confidence in capital markets

Strengthening corporate accounting controls

Standardized key financial processes

Elimination of redundant Information Systems

Better internal control -> accuracy of information

Increased independence between board of directors and management

Increased responsibility for financial reporters

Cons No guidance for companies Intrusive Competitive disadvantage vis-à-vis foreign firms Costly, time-consuming and difficult to implement 2002: no. of companies deregistering from the public stock exchanges nearly tripled 2004: only 10 new foreign listings “ Reform" of the accounting industry ended up being a gold mine for the very auditing firms that Congress wanted to punish, as a few mega firms thrive in a more regulated market . (Wall Street Journal) “ A colossal failure, poorly conceived and hastily enacted during a regulatory panic. . . . SOX supporters are dead wrong in their assessment of SOX—both logic and evidence make it clear that SOX was a costly mistake“ (H. Butler & L. Ribstein)

No guidance for companies

Intrusive

Competitive disadvantage vis-à-vis foreign firms

Costly, time-consuming and difficult to implement

2002: no. of companies deregistering from the public stock exchanges nearly tripled

2004: only 10 new foreign listings

“ Reform" of the accounting industry ended up being a gold mine for the very auditing firms that Congress wanted to punish, as a few mega firms thrive in a more regulated market .

(Wall Street Journal)

“ A colossal failure, poorly conceived and hastily enacted during a regulatory panic. . . . SOX supporters are dead wrong in their assessment of SOX—both logic and evidence make it clear that SOX was a costly mistake“

(H. Butler & L. Ribstein)