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Sarbanes-Oxley Leaves Mixed Emotions Throughout Industry

It has been seven years since President George W. Bush signed into law the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act of 2002. SarbOx or SOX, as the acronyms quickly evolved to become, was supposed to prevent a repeat of the rash of market mayhem and corporate malfeasance that brought down Enron, GlobalCrossing, and WorldCom and at one point even threatened to slay industrial giant Tyco. But many economists, CEOs, CFOs and even some of the nation’s highest-profile CPAs have said SOX went too far. Yet, the biggest Wall Street story since Sarbanes-Oxley has turned out not to be how SOX ruined the American business landscape. Actually Sarbanes-Oxley has turned out to be almost a footnote to the big stories in business during the last couple of years. Why didn’t Sarbanes-Oxley prevent last year’s meltdown on Wall Street? The short answer: The legislation was never meant to stop perfectly legal activities, no matter how shortsighted they might be. As one CPA specializing in SEC compliance told me, Sarbanes-Oxley was too wide-ranging, but too narrowly defined. At its core, Sarbanes-Oxley was meant to do a handful of things: create a Public Company Accounting Oversight Board, the first non-self-governing body to oversee the accounting industry; to ensure the independence of auditors by requiring audit partner rotations, and preventing auditing CPA firms from doing business advisory work for audit clients; to create more accountability of corporate officers and senior executives by requiring them to personally guarantee the accuracy of financial filings; to provide more transparency with more off-balance-sheet documentation and require greater levels of reporting to the Securities and Exchange Commission; plus establishment and enhancement of penalties for tampering with or altering financial data; institute stricter standards for identifying, reporting and eliminating conflicts of interest, and initiate some now complete investigations of the misdoings of Enron, et al, as well as call for CEOs to sign corporate tax returns. “My First thought was it was needed because of Enron,” said Stephane Vashone, audit partner at Encino-based Rose, Snyder & Jacobs. “But right from the start, I thought it went overboard, and was too costly to comply with.” Huge amount of work Nevertheless, Vashone acknowledges that SOX brought in more work than firms could handle that first couple of years. “Big firms were firing their smaller clients, so we got several clients from Big Four firms,” he said. “It was a great thing for us. Clients realized it was good for them too because they found out they could get a lot more personalized service from a smaller accounting firm.” At the heart of Sarbanes-Oxley is Section 404 (now 404B), which was most responsible for the increase in business for accountants. That section contains most of the internal controls and compliance provisions of the law. Until this year, only public companies with revenues of $75 million or more had to comply with 404; all publically traded companies will have to comply beginning with fiscal years ending on or prior to December 31. “That’s the end for Sarbanes-Oxley,” said Kevin Holmes, partner at Woodland Hills’ Good, Swartz, Brown & Berns, a Division of J.H. Cohn. “There are no more new mandates to implement after those… filers.” By “the end” Holmes wasn’t saying SOX is dead, only that the long road to full implementation will have come to an end January 1, 2010. It wasn’t ever meant to take as long as it has to institute SOX, but delays sought by business and championed by Congress made it so. According to Holmes, some businesses are under the misconception that more delays will save them from Sarbanes-Oxley once again. “What the SEC has tried to do is delay until they’ve gotten it right with the larger companies so it won’t be a significant financial burden for smaller companies,” he said. “But the end has come for any further delays.” In the end, was Sarbanes-Oxley really necessary? Could or would a profession with a long, proud history of self regulating have pulled itself up and dusted itself off after the demise of Enron’s lead accounting firm and Big Eight powerhouse Arthur Andersen? Would it have done the right thing and, for instance, demanded a higher level of accountability from its auditors and clients? Some say yes; others say no. “I’ve always been a firm believer in the profession’s ability to regulate itself,” said Kevin Holmes. “We take a lot of pride in our own ability to do that.” Yet, Holmes, who worked at Arthur Andersen before Good, Swartz, Brown & Berns (though not on the Enron account), does believe SOX had a positive impact overall. “I don’t think the legislation was necessary,” he said. “But my view, as it relates to the profession, and as it relates to regulating of the registrar community, is that the legislation, especially Section 404, has significantly improved the filings. Certification required In fact, what may indeed be the most significant provision of Sarbanes-Oxley was the advent of certification. CEOs, CFOs and other officers of publicly traded corporations have been required to individually certify the veracity of financial filings since the implementation of Sarbanes-Oxley. In fact, if alleged Countrywide conspirator Angelo Mozilo ends up doing time behind bars, it may partially be as a result of information he certified with his signature on Securities and Exchange Commission documents as the company’s CEO. On the other hand, it may be the mountains of Sarbanes-Oxley related SEC filings that gets Mozilo off the hook. Two weeks ago, he filed a motion to have the case, in which the government accuses him of defrauding investors by hiding the former mortgage leader’s true financial status, dismissed. Lawyers for Mozilo claim an accurate picture of the company was plainly available by looking at the entirety of documentation about Countrywide’s financial status, rather than just its Form 10-K filing. According to Rose, Snyder & Jacobs’ Stephane Vashon, Sarbanes-Oxley was definitely needed. He also believes some kind of new regulation needs to follow last year’s banking crisis. He just hopes lessons have been learned from Sarbanes-Oxley “I think something needed to be done back then,” he said. “But clearly, with eight years of hindsight, we know there was too much documentation required by Sarbanes. We don’t want to overcorrect this time.” The Church of Deregulation is fast losing its congregants, but it still draws a big crowd. The number of adherents to the notion that all regulation is bad had begun to mushroom by the late 1970s and continued doing so right through August of last year. The big mortgage banks first announced their internal crises in early September. The outright collapse of Lehman Brothers followed a week later. Since then, many former deregulation fanatics have come down from the rafters of said church, and taken a more traditional point of view, wondering if deregulation had gone too far. As the government returns to a hands-on approach to Wall Street, it can learn from the accounting industry what worked and what didn’t eight years ago, when it got its tight-fitting SOX. One move that could go far to restore stability on Wall Street might be to restore the firewalls, erected after the Great Depression, which prevented (among other things) banks from owning insurance companies and vice-versa. Pres. Bill Clinton did away with those Roosevelt-era rules in 1997. Yet, had they been in place last year, there would have been no AIG debacle in 2008. So what role does the accounting industry have in shaping the coming new banking regulations? If nothing else accountants can offer, through their professional associations, lobbying for reforms that make sense, while not advocating for anything but recognition of the facts. That is what a profession worthy of the trust that allowed it to be self-regulated for more than 100 years would do. Staff Reporter Thom Senzee can be reached at (818) 316-3135 or at

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