Almost four years ago, I wrote a blog, “A Farewell to Michael Oxley,” paying tribute to the former Republican member of the U.S. House of Representatives who died on January 1, 2016. Today, it is fitting that we issue another farewell. On December 7, the family of Paul Sarbanes announced the death of the former Democratic senator the previous day. Together, these two men co-authored the landmark Sarbanes-Oxley Act of 2002 (SOX), forever cementing their names to a legacy of advocating responsible corporate behavior and fairness in public and financial reporting.
In today’s era of political gridlock, it is fitting to acknowledge the bipartisan partnership between Mr. Sarbanes and Mr. Oxley as they framed perhaps one of the most impactful pieces of legislation enacted by Congress in terms of influencing corporate governance and behavior since the federal securities laws were enacted in the 1930s. True, there was a strong political will to act at that time. The high-profile corporate frauds that precipitated that will had caused significant harm to investors and retirement funds. The egregious abuses of the Enron era had created a momentous call to action no one could ignore.
Paul Sarbanes had just been re-elected to his fifth term in the Senate. He was a political heavyweight on Capitol Hill, having served on the House Judiciary Committee during the Watergate years resulting in the impeachment of President Richard Nixon. But as distinguished as his years of public service were, 2002 was his moment. Bad, irresponsible and illegal behavior had resulted in shareholders suffering significant losses and news was rampant over people losing their life savings. Overall confidence in the capital markets had taken a dangerous hit. With this backdrop, together with Mr. Oxley, Mr. Sarbanes stepped up to protect investors and create more transparency in financial reporting.
For those who began their careers after that time, SOX did much more than require reporting on internal controls by management and the independent auditors. It also required the CEO and CFO to evidence their ownership of financial and public reporting through their quarterly certifications regarding the fairness of reported results and the efficacy of underlying disclosure controls and procedures and internal control over financial reporting. It created the Public Company Accounting Oversight Board. It instituted clawbacks of executive compensation. And it did much more to send a powerful message of accountability for fair public and financial reporting.
For sure, SOX has had its share of critics, both when it was initially enacted and over the years. The endless debate on the relative costs and benefits of SOX Section 404 rages on. While SOX certainly isn’t perfect and the learning curve to implement it was painful, it has stood the test of time. No matter what one thinks of SOX, the record is clear that the increased emphasis on internal controls has resulted in a precipitous decline in restatements of financial statements. And that is exactly what the law was intended to accomplish. Further, the number and severity of accounting issues underlying each restatement have declined. That outcome, too, was intended. For those interested, my blog on Mr. Oxley refers to some of the research supporting these assertions.
A point I made in the aforementioned blog regarding Mr. Oxley I make here again. Some have questioned the value of SOX because it did not prevent the 2007-2008 financial crisis. The truth is that the financial crisis was a systemic breakdown on a number of fronts involving an entire industry – a virtual “perfect storm.” SOX doesn’t mandate how financial institutions are to be run, how risks are to be managed, or when CEOs and their boards should need to take a fresh look at the validity of the critical assumptions underlying their corporate strategy and business model. SOX is about reporting results, not about calling the shots. That remains a management and board imperative.
Along with Mr. Oxley, Paul Sarbanes should be credited for the cultural change he enabled with this landmark legislation. He was a true statesman, a Democrat who reached across the aisle to work with his fellow Republican legislative partner to enhance responsible corporate behavior in public and financial reporting. Imagine that. As I mentioned in my blog of four years ago:
These two men stepped into the arena as their country watched, with everyone knowing that something had to be done. Today, with forward progress in Washington D.C. so often hamstrung by partisan gridlock and intransigence, Sarbanes-Oxley shines as an example of what can be done when our elected officials come together to work for the common good.
As did Mr. Oxley, Paul Sarbanes performed admirably when he had his moment in the legislative spotlight. We bid him farewell and offer our sincerest condolences to his family.
For those interested, our latest SOX survey was completed in the first quarter of 2020 before the full scope and impact of the COVID-19 pandemic was realized. However, since the results largely reflect SOX programs and work performed during fiscal year 2019, the findings remain highly relevant. In fact, the trends we identified in our survey with regard to the use of automation and technology tools are illuminated even further in this pandemic, with a massive percentage of the workforce working remotely and the specter of more lockdowns looming large on the horizon.