Thursday, September 07, 2006

What the Sarbanes-Oxley Act Did or Did Not Change

When first passed, I thought the Sarbanes-Oxley Act of 2002 created new roles in enforcement and overseeing, but because these roles were new and there was no previous estimate as to how much all of this new involvement would cost or what it would actually do, I was skeptical from the start.

So, when at work an article written by James Brady Vorhies from the American Institute of Certified Public Accountants (AICPA) is passed around at my workplace like what he’s writing is some sort of revelation; I have to stop and say, “Why?”

I recommend a paper by Lawrence Cunningham. Cunningham goes through the Sarbanes-Oxley Act pointing out that the Act didn’t necessarily change everything, but merely reinforced some requirements that were already there. For example, at the company I work for, we always had to do balance sheet reconciliations.

But another one of my questions lies within why some high ups still listen to the AICPA as much as they do. As Cunningham’s paper states:

Stripped of power to make authoritative auditing standards is the American Institute of Certified Public Accountants (AICPA)

It is replaced by a Public Company Accounting Oversight Board (PCAOB) to be funded instead by public companies and led by mostly non-CPAs.

The AICPA is a professional organization comprised of CPAs and serves as a trade group for the profession. The POB (Public Oversight Board) was funded by the AICPA, a mix that risked sacrificing its independence and objectivity in promulgating GAAS (Generally Accepted Accounting Standards) and supervising the public auditing industry.

Naturally, the obvious counter would be: why listen to the PCAOB instead of the AICPA? What makes them better at oversight?

First, the PCAOB is a creature of statute, not grace. Second, a majority of its five members will be non-CPAs and its chair cannot have practiced public accounting during the year before becoming chair. Third, it will be funded by public company shareholders, not the AICPA. Fourth, members will be full-time and serve 5year terms (with a two-term limit) and be subject to removal for cause by the SEC.


These moves are intended to strengthen the PCAOB’s independence from the profession, a longstanding philosophical and practical conflict between the SEC and the AICPA. Whether they will work is uncertain. But this is a major step, perhaps the silver bullet of the Act.

Of course, the problem is that like any “silver bullet”, it remains to be seen if the PCAOB will be awesome as the American public hopes it will be.

Nevertheless, I hope that managers will rely less on the “flavor of the month” topic from the AICPA and simply stick to filing the reports that need to be filed in a thorough fashion without having to glorify the monotony of the activity. We all understand the merits of the balance sheet reconciliation, and anyone who doesn’t probably shouldn’t be doing it in the first place, especially when you’re doing it to audit the company.

Thanks to James Vorhies for taking the time to write the article, but please managers, if you think it’s necessary to show us the importance of the balance sheet reconciliation, then we still have some big problems in corporate America.
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