In July 2002, the Sarbanes-Oxley Act swept into law on a tide of populist indignation over the Enron and Worldcom accounting scandals.
Five years on, Sarbox – intended to restore confidence in corporate America – has become a synonym for heavy-handed regulation, chief whipping boy for those who fear US markets are losing their competitive edge to lighter-touch jurisdictions.
That reputation is largely undeserved. Given the political pressures that rushed the legislation through, its achievements – for example, in promoting audit committee independence – are perhaps more notable. Even companies that have struggled to comply concede that Sarbox has focused attention on the quality of financial reporting.
Yet the Securities and Exchange Commission was unable to prevent some more cumbersome aspects of Sarbox taking effect. The reviled section 404, requiring outside auditors to attest the quality of internal risk controls, was implemented in a way that allowed over-zealous auditors to run riot, imposing unnecessarily steep compliance costs. Many blame the legislation for a fall-off in listings by foreign companies and the measures have undeniably damaged perceptions of US markets.
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