Sarbanes-Oxley isn’t enough

In July of 2012 a house subcommittee held a hearing to review how the Sarbanes-Oxley has impacted the accounting profession. The law was passed in 2002 after the Enron and Worldcom demise two of the biggest accounting scandals in American history. Chairman of the center for Audit Quality’s professional Practice Executive Committee, Michael J. Gallagher, “believes the Act has been successful in achieving its objectives.” Marie Hollein, CEO of Financial Executives International, adds, “The requirement that CEOs and CFOs personally certify their company’s financial statements is the crown jewel of Sarbanes-Oxley.” While I believe this act has certainly helped with the issue of holding professionals more accountable in their accounting standards it certainly hasn’t fixed the problem.

As of right now external audits only account for about 3% of all frauds that are found. The PCAOB, public accounting oversight board, also reports that around 35-40% of all audits fail. Meaning that they issued opinions on financial statements with insufficient evidence to support their claims. This is a very alarming number, especially considering how much investors rely on this information to make informed financial decisions. I think a lot of this stems from auditing firms concerned too much with the business aspect of their company and not remembering their true purpose which is to provide a service to the public. An audit is supposed to be an independent outsiders look at a company’s financial statements, but many of these firms provide tax services and internal control reviews giving them potential conflicts of interest when performing audits.

SOX just isn’t enough and more needs to be done. Corporate governance scandals are still going on, Groupon and Wal-Mart are some recent examples. The government should add more regulation requiring that tax and audit services be provided by different companies and give more oversight and power to the PCAOB. It will be interesting to see how many more big scandals it will take to add more regulation to the environment.