Prior to 2002, it wasn’t unusual for auditing firms to have lucrative consulting contracts with the selfsame clients they audited. This was the case with Big Five firm Arthur Andersen and Enron, the seventh-largest company trading on the US stock market. Then, in 2001, Enron went bankrupt amid an SEC investigation for fraud.
Investors’ confidence in capital markets was shaken. In response, Senator Paul Sarbanes, a Democrat from Maryland, and Representative Michael Oxley, a Republican from Ohio, proposed a bill that would regulate the auditing profession through the creation of the Public Company Accounting Oversight Board (PCAOB), render auditing firms more independent, require more robust reporting over internal controls, and hold top management responsible for the content of financial statements.
The Sarbanes-Oxley Act, or SOX, as it was abbreviated, enjoyed broad bipartisan support. It passed almost unanimously in the House and Senate and was signed into law by President George W. Bush in July 2002.
The introduction of SOX signaled an evolution in how finance and accounting professionals fit within their organizations and the work they were expected to do.
SOX: The early years: SOX “created a lot of new challenges for the accounting profession in terms of resources,” Vin Nguyen, a partner at accounting firm UHY with 30 years’ audit experience, told CFO Brew. Nguyen was promoted to assurance manager around the time SOX became law. He remembers that firms needed to design and implement new audit approaches, all while absorbing an influx of new clients that had once belonged to Arthur Andersen.
On the client side, SOX brought challenges as well. The “cost of auditing skyrocketed,” former SEC Chair Mary Jo White said during a panel session at St. Joseph’s University. So did the cost of going public. In fact, SOX may have contributed to the private equity boom, Nguyen, who’s worked on many IPOs and SPACs, surmises.
Companies, he said, are “always contemplating, does it make sense for us to be a public company, or does it make sense to stay private and take on the capital from private equity” and not have to deal with SEC requirements?
Read the full article published by CFO Brew.
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