Document Type
Essay
Publication Title
Loyola University Chicago Law Journal
Publication Date
2008
Volume
39
First Page
595
Abstract
(Excerpt)
In 2002, the Sarbanes-Oxley Act1 ("SOX" or the "Act") not only changed the details relating to financial reporting, internal controls, and corporate governance in general, but also changed the discussion about corporate climates and cultures, at least temporarily. The political discourse leading up to SOX's enactment in the aftermath of the accounting debacles of 2001 and 2002 was replete with discussions about more ethical and responsible corporate governance. The Act's passage, accompanied by the get-tough-on-Corporate-America speeches made by President George W. Bush and others changed the way corporate actors discuss their ethical obligations. The Act's strict requirements regarding financial disclosure and accounting inspired a climate in which discussions about corporate ethics moved from the periphery of corporate discourse to the center of corporate discourse.
Five years after its enactment, however, the business community's criticism of SOX is almost virulent. An examination of some of the post-2002 discourse about SOX within the business community reveals that most of the business community has deemed SOX illegitimate. According to a survey described in CFO magazine, ninety-four percent of executives from 217 companies surveyed in 2005 felt that the cost of compliance outweighed the benefits of SOX. Another study revealed that more than half of directors in the Americas want SOX repealed or "overhauled." Seventy-two percent of directors surveyed in the Americas said SOX made them too cautious, and consequently they are "not taking the necessary risks to drive growth." Fifty-nine percent of directors surveyed in the Americas have declined a board position due to the risk associated with failure to adequately comply with SOX. Academics and business people assert that some of the Act's most significant provisions provide little or no protection for investors. Commentators lament the high costs imposed on businesses to comply with SOX.
Five years after its enactment, regulators acknowledged that the value of SOX is found in the principles on which it is based. Recognizing that the underlying principles of the Act are as important as the details relating to specific corporate governance changes, regulators, attempting to reduce unnecessary costs, provided guidance in 2007 intended to change the interpretation and implementation of SOX's most controversial provision, Section 404. Section 404 requires managers to install and assess internal controls designed to lower the risk that financial statements will contain material misstatements or omissions The Securities and Exchange Commission ("SEC" or "Commission") and the Public Company Accounting Oversight Board ("PCAOB") advised managers and auditors to undertake an approach that focuses on the principle of risk assessment. This principles-based approach should replace the detail oriented "compliance-by-checklist" approach that some managers have taken when complying with SOX.
This Article addresses four basic questions. First, what is the impact of the business community's attack on the legitimacy of SOX? Second, what will be the nature of corporate compliance with a law that is deemed illegitimate by so many to whom the law applies? Third, will the business community's disdain for the Act erode the substance of the Act? Finally, will business people who conclude that SOX is illegitimate ignore the principles on which the Act is based and continue to place form over substance when they comply?
SOX changed some of the details of corporate governance, but it also took aim at unprincipled, unethical conduct. The focus of this essay is not on the details of the critiques of the Act, but on the way the discourse is unfolding today. The tone of that discourse may undermine one of the Act's fundamental principles: ethical and diligent compliance. Managers and auditors have become mired in the minutiae of SOX compliance. Because most members of the business community question the efficacy and legitimacy of SOX, they seem to engage in "compliance-by-checklist," checking off the details related to complying with SOX while ignoring the broad principles of ethical compliance and diligent monitoring. These fundamental principles get lost in the compliance-by-checklist approach that results from the business community's criticism of SOX and conclusions about its value and the legitimacy of compliance. The Act's most salient goal is to increase investor confidence, but the "'compliance by checklist' mode with respect to disclosure and corporate governance . . . may provide assurance that a company is following the rules, [even though] it is debatable whether investors are better off for it."
Comments
Available at: https://lawecommons.luc.edu/luclj/vol39/iss3/7/