{"id":374,"date":"2006-03-24t19:52:00","date_gmt":"2006-03-25t00:52:00","guid":{"rendered":""},"modified":"-0001-11-30t00:00:00","modified_gmt":"-0001-11-30t05:00:00","slug":"sen-sarbanes-defends-sox-law","status":"publish","type":"post","link":"\/\/www.g005e.com\/2006\/03\/24\/sen-sarbanes-defends-sox-law\/","title":{"rendered":"sen. sarbanes defends sox law"},"content":{"rendered":"
in a speach to the consumer federation of america (cfa), where he was awarded the lifetime consumer hero award, sen. paul s. sarbanes (d-md.) <\/a>defends the sarbanes-oxley law he co-authored and lashes out at critics. it’s interesting reading, whether you agree with him or not.<\/i> excerpts:<\/i><\/p>\n “the law is working as intended.” hear it from sen. sarbanes himself…<\/b><\/i><\/p>\n when on june 6, 2001 the democratic party became the majority party in the u.s. senate, i became chairman of the banking, housing and urban affairs committee. when i came to the congress, i was skeptical of the seniority system. at that moment i saw it in a new and entirely positive light. <\/p>\n as the new chairman i held a press conference to set out my priorities for the committee. high on the list was consumer and investor protection. specifically i mentioned predatory lending, privacy, access to capital and credit for all americans, household debt, credit-card abuses and financial education and literacy. notably it did not include anything resembling the public company accounting reform and investor protection act ? which today is known as sarbanes-oxley. <\/p>\n you are familiar with the contents of sarbanes-oxley because the cfa was there every step of the way through the entire legislative process ? through ten hearings with some forty witnesses over a period of several months. in fact your chairman and my former colleague, howard metzenbaum, on march 20th, 2002, presented comprehensive and well-informed testimony to the committee that proved invaluable as we drafted the legislation. <\/p>\n the legislation came in direct response to a crisis whose dimensions it is all too easy, in retrospect, to play down. it is time to remind those who complain that the congress ?overreacted? or ?overreached? in passing sarbanes-oxley of several crucial points: <\/p>\n -in 2001 the escalating number of corporate scandals caused a grave crisis in investor confidence. critics who now attempt to minimize the seriousness of the situation must not go unchallenged. at the time, the wall street journal did not mince words: -the collapse of enron was the canary in the mineshaft. it was the biggest bankruptcy in the nation?s history ? until it was eclipsed by worldcom?s, some six months later. a number of very major, highly-regarded companies were using convoluted and often fraudulent accounting devices to inflate earnings, hide losses and drive up stock prices. brazenly dishonest stock recommendations came to light. the number of restatements had been rising steadily, from 92 in 1997 to 294 in 2001. according to the gao, over that five-year period 10 percent of listed companies had at least one financial restatement attributable to accounting irregularities. <\/p>\n -the securities and exchange commission faced a growing budget crisis. the gao estimated that while sec staff resources increased about 20 percent in the 1990s, staff workload had increased 80 percent. <\/p>\n yet the administration?s budget request to congress for fy2003 for the sec was, as sec chairman pitt told a senate appropriations subcommittee, essentially ?zero-growth.? <\/p>\n while [sec] chairman [harvey] pitt was presenting the administration?s budget request to the congress, the president announced to the nation a ten-point plan to ?improve corporate responsibility and protect america?s shareholders? and said, ?i call upon the securities and exchange commission to take action.? <\/p>\n -the roots of the problem lay not with the legendary ?few bad apples? but rather with systemic and structural defects that required a statutory remedy. <\/p>\n -there was a remarkable consensus among our witnesses on the nature of the problems, notably lack of auditor independence, ineffective regulatory oversight of accountants, lax standards of corporate governance and securities analysts? conflicts of interest. <\/p>\n the bill was drafted with advice from outside experts, the american law division of the congressional research service and senate legislative council. it was redrafted in light of committee members? and others? comments. it came to the committee on june 25 with broad bi-partisan support, was reported to the senate on a 17-4 vote, and unanimously approved by the full senate. <\/p>\n now the law is working as intended. <\/p>\n -auditor independence has been restored. over two decades it had been compromised as accounting firms increasingly turned from core services to more lucrative consulting for their revenues. whereas in 1977 accounting and audit fees had accounted for 70 percent of revenues, by 1998 they accounted for only 34 percent of revenues. that pattern has now been reversed. revenues from non-audit services declined from 72 percent of total revenues in 2002 to 42 percent in 2004. <\/p>\n -the public company accounting oversight board provides the necessary rigorous regulatory framework for the accounting industry, replacing self-regulation, which had demonstrably failed. <\/p>\n -the sec has the resources to hire additional staff and improve its technology infrastructure. <\/p>\n -corporate governance practices are changing for the better. there is abundant evidence on this point. to cite just one example: <\/p>\n two former partners at goldman-sachs, writing in the financial times under the heading ?sarbanes-oxley has let fresh air into boardrooms,? discussed a governance metrics international study of 2,500 international companies that found the reforms ?have led to a 10 percent improvement in the corporate governance performance of large u.s. companies compared with their foreign counterparts.? <\/p>\n they wrote: ?the finance and audit committees of corporate boards are taking their roles much more seriously and imposing greater accountability on their members. gone are the days when enron?s directors could approve a stock split, place shares in a compensation plan, purchase a corporate jet, launch an investment in a middle east power plant and grant the chief financial officer exemption from the energy trader?s code of conduct ? all in a single, one-hour teleconference.? <\/p>\n -investors have regained confidence in our capital markets.<\/p>\n despite all the signs of progress, the law has come under a number of criticisms. <\/p>\n -it is asserted that the law was enacted ?in haste.? according to a wall street journal editorial, ?the mad rush to pass sarbox in 2002 was less about keeping business honest than it was about keeping congressmen in office.? this is an affront to the hard work and common sense of the members of congress who voted for the law, as virtually all did. <\/p>\n -a lawsuit asserts that the formation and operation of the public company accounting oversight board is unconstitutional. the pcaob?s structure was reviewed by the american law division of the congressional research service of the library of congress and several distinguished professors of constitutional law, and all approved of the structure under relevant constitutional provisions. a recent detailed analysis by the american law division of the suit?s allegations affirms that earlier finding.<\/p>\n much of the criticism of the statute has been directed to the two short paragraphs that constitute section 404. one requires all public companies to have a system of internal controls. the other requires that the system of internal controls be attested to. <\/p>\n the internal-controls requirement is hardly new to sarbanes-oxley. it was established by the 1977 foreign corrupt practices act and the language is virtually identical to provisions in the federal deposit insurance corporation improvement act of 1991.<\/p>\n there is no question that costs are involved particularly if the existing system of internal controls is wanting. there is also general agreement on the need to focus on the small companies. both the sec and the pcaob have taken steps to address it. <\/p>\n the pcaob last november issued guidelines designed to improve auditors? efficiency and focus. at the time of his retirement as the board?s chairman, bill mcdonough, who deserves great credit and thanks for his leadership, said: ?from what we can gather, the second year is going much better.? he expressed confidence that ?auditors will be able to perform more effective and efficient audits in future years.? <\/p>\n the sec has twice extended the deadline for smaller companies? compliance, which is now july 2007. <\/p>\n last april the sec held a roundtable on internal control reporting, and a second roundtable jointly sponsored by the sec and the pcaob is scheduled for may 10. <\/p>\n in late 2004 former sec chairman bill donaldson announced an sec advisory committee on smaller companies. this is not the approach we should be taking towards this challenge. <\/p>\n -as the cfa pointed out in a letter to sec chairman cox, only one of the twenty-one members of the advisory committee represented the investing public. he was the only member of the committee?s section 404 subcommittee to vote against the exemption, and one of only three members of the committee to oppose it. in his dissent, he wrote that the exemption proposal suggests that ?you can?t have meaningful cost reductions unless you eliminate 404, including the investor protections.? <\/p>\n he is correct in suggesting that cost reduction and investor protection do not require an either\/or choice but rather a reasonable and responsible balance and accommodation. <\/p>\n -the recommendation ignores the landmark 1999 treadway commission study that found the typical company in a commission enforcement case to be very small, and warned that focusing only on larger companies ?may fail to target companies with greater risk for financial-statement fraud activities.? <\/p>\n a letter from professor james cox of duke university and a group of distinguished law professors in the securities field states there is no statutory basis for the proposed exemption: ?it is our opinion that section 36(a) of the securities exchange act, or for that matter section 3(a) of sarbanes-oxley, does not empower the sec to exempt issuers from section 404 of sarbanes-oxley.?<\/p>\n professor cox and his colleagues point out that sarbanes-oxley does not ?authorize the sec to grant exemptions from its provisions,? but it does give both the commission and the pcaob the latitude to ?tailor section 404 requirements differently for smaller issuers? so that investor protection is assured while costs are reduced. <\/p>\n fortunately, vigorous opponents of the recommendation have stepped forward, beginning with the cfa. i want to commend the forceful letter you have sent to the commission jointly with consumer action, consumers union, the u.s. public interest research group and fund democracy. <\/p>\n -many others have written – the afl-cio, the aarp, the council of institutional investors, several state pension systems, four former chairmen of the sec with a combined unbroken tenure extending back to 1989, five eminent financial authorities ? john biggs, john bogle, charles bowsher, arthur levitt, jr., and paul volcker. <\/p>\n -a letter from the accounting firm grant thornton opposed the exemption because it would create a two-tier system that would ?place investors in smaller companies at a disadvantage compared to investors in larger companies.? <\/p>\n -floyd norris reported in the new york times on march 10 that sec chairman cox, when asked about section 404, said: ?with respect to 404 compliance, the question is not whether but how.? <\/p>\n the benefits of compliance are emerging. <\/p>\n -an online publication, sarbanes-oxley compliance journal, recently summarized in these terms the results of a recent survey of 180 senior finance executives: -the number of restatements has risen, almost doubling from 2004 to 2005. the wall street journal ran a story on march 3rd under the heading: ?sarbanes-oxley changes take root ? jump in profit restatements shows impact of controls; making changes quietly.? <\/p>\n whereas before passage of the legislation the escalating number of restatements was a danger sign, the numbers today indicate that the internal control requirements are having the desired effect. as the controls increasingly take effect, the number will decline. <\/p>\n pricewaterhousecoopers?s ceo, samuel dipiazza, has given us an especially illuminating report on a study of 1,200 chief executives worldwide that his firm conducted. the results show a divide, he said, ?between ceos who view these newly mandated compliance expenditures as costs involving onerous requirements, and those who view them as investments offering significant opportunities and sources of competitive advantage.? <\/p>\n he observed: ?the ?investment? group outnumbers the ?cost? group by almost two to one… a majority of executives are beginning to turn this new landscape to advantage by tightening their operations and managing risks.? <\/p>\n the opportunities are what a recent roundtable of accountants and company executives called ?the silver lining of sarbanes-oxley.?<\/p>\n the framework now in place goes a long way toward assuring the integrity and transparency of the markets while offering new opportunities to our public companies. the sec has done a tremendous job in writing the rules and regulations called for in the legislation and the public company accounting oversight board is now a highly professional and up-and-running organization. <\/p>\n this is the time to move forward, not backward, in a steady and deliberate manner. problems can be resolved without undermining the framework. together we will continue our work toward that end. as always, our aim remains to protect investors and make our markets the envy of the world.<\/p>\n","protected":false},"excerpt":{"rendered":" in a speach to the consumer federation of america (cfa), where he was awarded the lifetime consumer hero award, sen. paul s. sarbanes (d-md.) defends the sarbanes-oxley law he co-authored and lashes out at critics. it’s interesting reading, whether you … continued<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"","_relevanssi_noindex_reason":"","footnotes":""},"categories":[7],"tags":[],"class_list":["post-374","post","type-post","status-publish","format-standard","hentry","category-bsg-finance-professional"],"acf":[],"yoast_head":"\n
\n[hat tip to lynn turner for alerting us.]<\/p>\n
\n“the benefits of compliance are emerging.”
\n“regrettably the advisory committee has now made a sweeping recommendation that would effectively exempt four out of every five companies from the requirements of section 404. this is not the approach we should be taking towards this challenge.”<\/p>\n
\n?the scope and scale of the corporate transgressions of the late 1990s now coming to light exceed anything the u.s. has witnessed since the years preceding the great depression.?<\/p>\n
\nregrettably the advisory committee has now made a sweeping recommendation that would effectively exempt four out of every five companies from the requirements of section 404. <\/p>\n
\n?unexpected benefits from sarbanes-oxley compliance?respondents said sarbanes-oxley enables them to manage risk and uncover controls weaknesses?.respondents said sarbanes-oxley boosts operational performance.?<\/p>\n