The document discusses the Sarbanes-Oxley Act (SOX) of 2002, aimed at reforming corporate governance and financial practices in response to scandals. It outlines the formation of the Public Company Accounting Oversight Board (PCAOB), its goals, pros and cons, and the challenges in implementation. While SOX aimed to restore confidence in financial markets and enhance accountability, it faced criticism for being costly and ineffective, resulting in unintended consequences for companies and auditing firms.

1. Carmen Neghina, Hella Rieger 2008

2. Content Overview Basic content Pros and Cons PCAOB

3. Overview

4. 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

5. 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

6. Content

7. 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

8. 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

9. 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

10. Pros and Cons

11. 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

12. 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)