Happy Anniversary, SOX

This July marks the 15th anniversary of the enactment of the Sarbanes-Oxley Act (SOX). At this milestone, we should take a moment to reflect on the impact of SOX, which helped the United States advance into a new era for financial reporting and public company auditing.

In my view, we should be celebrating SOX as well as reflecting upon it. The law, which strengthened investor confidence and the system of investor protection, stands as a model for what bipartisan policymaking can achieve.

Born of Crisis

To understand SOX, one needs to go further back than 15 years. In the spring of 2000, the dot-com bubble burst, leading to the bankruptcies of once high-flying companies. Fraud and accounting scandals also helped bring about the failure of companies considered blue chip, and high-ranking executives from some of those companies would eventually be imprisoned.

These events, along with a spike in corporate earnings restatements, shook financial markets and investor confidence in them. The NASDAQ Composite Index, for example, dropped 78 percent from the spring of 2000 to the fall of 2002.

The policy response was equally intense. As noted by the Securities and Exchange Commission Historical Society, a “groundswell of support” drove the reform of corporate governance standards and the passage of the SOX by votes of 99-0 in the Senate and 423-3 in the House of Representatives. President George W. Bush signed the bill into law on July 30, 2002.

From a simple starting point—"an Act to protect investors"—SOX's myriad provisions aimed to enhance auditor independence, corporate responsibility, and financial disclosures. SOX also created the Public Company Accounting Oversight Board (PCAOB).

Perspectives on a Policy Achievement

Has SOX been a success? I believe firmly that it has, but you don't have to take my word alone on that.

Strong US investor confidence over the last decade is just one measure of SOX success, as are encouraging trends in financial restatements by companies. No wonder recent polling shows that strong majorities of financial advisers and chief financial officers register support for important investor protection provisions in SOX.

You can also hear about SOX success from regulators who were present at the law's creation and implementation. Last January, the Center for Audit Quality (CAQ) assembled a panel to reflect on the recent history of auditing and the capital markets. Here is a sampling of what panelists had to say on SOX.

• Daniel Goelzer, PCAOB Board Member 2002-2012, Acting Chair, 2009-2011: “One of the other accomplishments of Sarbanes-Oxley was putting the audit committee at the center of the relationship between the audit firm and the company and taking the focus away from the auditor’s relationship with management. And I think that’s spilled over substantially into the culture at the accounting firms.”
• Mark Olson, PCAOB Chair, 2006-2009: “Before Sarbanes-Oxley was passed…you could actually measure the slowdown in the economy. It is that critical.”
• Harvey Pitt, Securities and Exchange Commission (SEC) Chair, 2001-2003: “Sarbanes-Oxley has provided the accounting profession with much greater leverage and the ability to improve audit quality than it had before the Act. In that sense, I would consider it a huge success.”
• Mary Schapiro, SEC Chair, 2009-2012: "[SOX] has been highly responsive to the financial frauds and crises that had emerged at that time, in a way that’s withstood the test of time. In terms of the outcomes of the law, it’s been highly successful."

Here is the full video of that discussion, which was moderated by PCAOB Chair James Doty.

Join the Conversation

As July 30 approaches, the CAQ will continue the SOX discussion on LinkedIn and other social media. We'll share videos, insights, and more using the hashtag #SOX15. We invite you to join us in sharing reflections on this landmark law.

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.