Samuel DiPiazza, William Parrett, Mike Rake, and James Turley: Is Sarbanes-Oxley working?

We ask four top accountants to assess the act designed to stop company fraud

The Sarbanes-Oxley Act has generally accomplished what legislators intended. Investors have more confidence in financial markets, and chief executives and chief financial officers of listed companies are more accountable for their organizations’ financial statements and securities filings. Equally, Sarbanes-Oxley has altered the relationship between management, audit committees and external auditors, while injecting some healthy tension.

These groups are communicating more than ever, and audit committees are now playing a more important role in financial matters.

Having met numerous audit committees during the past three years, I know that they are taking their new responsibilities seriously. Financial reporting is much improved as a result.

The act has also focused the accounting profession on transparency and corporate governance.
In my organization we have re-examined every policy, practice and performance system, and are constantly challenging ourselves to do better.

As with any new law, early implementation is difficult and there can be unintended consequences. We need to ensure that the compliance burden does not overshadow the positive effects on transparency and internal controls. Striking the right balance between good corporate governance and economic performance remains a challenge for both regulators and business.

Sarbanes-Oxley has set a benchmark that other legislators are debating. The European Union’s Eighth Directive is aligned with Sarbanes-Oxley in areas such as oversight, inspection and quality-assurance. The challenge now is to achieve greater regulatory convergence and acceptance of the concept of mutual recognition across the globe. The benefits of reduced costs and increased efficiency will be welcomed by business, investors and auditors alike.

James Turley is chairman and chief executive officer of Ernst & Young.

It would be foolish to view the Sarbanes-Oxley Act as a panacea for the corporate scandals that led to its passage. The truth is that regulatory solutions alone are rarely enough to eradicate such problems, especially where the root causes are highly complex.

Sarbanes-Oxley was necessary – and it is beginning to raise investor confidence – but winning back and sustaining public trust call for a more sweeping effort from all concerned.

For a start, accounting firms need to improve audit quality, so that future inspection reports by oversight boards are consistently “clean”. Investors should insist that corporate boards are composed of fully-engaged, independent, financially-sophisticated directors.

Those boards and the analysts who influence the markets need to place a much higher premium on corporate ethics and set expectations much higher for ethical executive behaviour.

Companies, as well as their outside advisers and auditors, must invest in preventing fraud, not just detecting it.

Investors, regulators and auditors must demand greater levels of financial transparency, tolerate fewer “off-the-books” transactions and replace arcane, technical accounting rules with clear, understandable principles.

Let’s give regulators the chance to regulate and markets the chance to embrace meaningful change.
If we do, investors will vote with their feet by walking away from companies that fail to live up to these higher expectations.

When investors choose in this way, we will know that we have won back the public’s trust.

Samuel DiPiazza, is global chief executive of PricewaterhouseCoopers. He is also a trustee of the Financial Accounting Foundation and serves on the International Advisory Board of Junior Achievement and the Executive Council of the Inner City Scholarship Fund.

The Sarbanes-Oxley Act was introduced to help rebuild confidence in the capital markets. However, more needs to be done. Legislation on its own will not prevent fraud or corporate collapse. The important factors are the tone at the top and the culture of the organization.

In the first year the new legislation placed a significant burden on business, both operationally and financially. Now, companies are finally beginning to see some benefits. The legislation has brought focus to accounting and financial reporting systems – a first step towards restoring public trust.

Regulation should reflect the increasingly-international nature of business. At the same time, firms must respond to the need for clear and consistent financial reporting. This requires that we move quickly to one global standard for auditing and for accounting.

The accountancy profession should also improve its relationship with the investor community by providing clear statements about clients’ accounts. We should be saying exactly what we mean, even though the language we are required to use is often restricted by legal and other pressures. The accountancy profession has taken on board criticism following recent corporate scandals and has already undertaken substantial reform.

At KPMG we have been working closely with regulators, companies and our peers to help enhance regulation and to restore confidence. The independent regulation of the profession is a welcome move; what is needed now is to bring consistency to regulatory oversight worldwide.

Mike Rake is chairman of KPMG International and the senior partner of KPMG in the UK. He is a chartered accountant and a Luxembourg Reviseur D’Enterprise. He is a member of the Confederation of British Industry President’s Committee .

Put simply, the introduction of Sarbanes-Oxley Act was an expected reaction by government officials and regulators to the corporate scandals affecting the market at the time. Investors were rightly mad, and the confidence in the biggest capital market in the world was waning.

Some people cite the cost of implementing Sarbanes-Oxley and call for amendment or some scaling-back of the law, or the regulations it required to be put in place. This view, while understandable on the heels of first-time implementation by the largest American companies, would result in changing the new regime before it is fully implemented.

It makes more sense to gain some additional experience and let some of the benefits of the new system take root and be understood before making significant changes.

These new requirements, while costly, are part of restoring investor confidence.

Clearly, some businesses are benefiting from the systems’ efficiencies that are being generated by the new internal control reviews. And these benefits will provide far greater returns and sustainability than the best legal representation money can buy.

William Parrett is chief executive of Deloitte Touche Tohmatsu and senior partner of Deloitte US. He is co-founder of the Global Financial Services Industries practice.