A chat with Paul Sarbanes, co-author of the Sarbanes-Oxley Act

NORFOLK

Many people know it as The Sarbanes-Oxley Act of 2002. Others, including corporate executives and auditors, refer to it as SOX.

Whatever they call it, the Public Company Accounting Reform and Investor Protection Act was the most far-reaching securities legislation passed since the 1930s.

The landmark statute took shape amid a string of corporate accounting scandals, including the collapse of giant energy company Enron Corp. and its auditing firm,

Arthur Andersen. Its co-authors - U.S. Sen. Paul Sarbanes, D-Md., and U.S. Rep.

Michael Oxley, R-Ohio - sought to curb the sorts of fraudulent accounting practices that occurred at Enron and elsewhere by improving the quality of corporate audits and imposing tougher standards for financial disclosure.

Sarbanes, who retired in January 2007 after 30 years in the Senate, was in Norfolk on Wednesday to receive the Economics Club of Hampton Roads' first Economic Impact Award. Before the club's gathering, he talked about the statute that bears his name.

How well do you think the Sarbanes-Oxley Act has worked?

I think it's worked well. It takes time to put something of that magnitude in place. A whole new entity, the Public Company Accounting Oversight Board, was created to oversee the auditors of public companies, set auditing standards and do inspections. Under the statute, there is a lot of latitude for the Securities and Exchange Commission and the board to modify the regulatory arrangements, and I think they've done a pretty good job. The board has attracted some absolutely top-flight people.

How difficult was it to write the act and get it through Congress?

When I took over chairmanship of the Senate Banking Committee in June 2001, I didn't expect to be dealing with this issue. Enron at the time was reporting 20 percent increases in earnings quarter to quarter. By December of 2001, they had declared bankruptcy, so these figures were phony. Lots of people lost their jobs. People's retirements were severely affected, so there are very real consequences from not doing things the right way.

In the end, the bill passed without dissent, but getting there was not that easy. As it turned out, just a few days before we were able to report the bill out of the Senate committee, the WorldCom scandal broke. That gave tremendous momentum for moving the legislation through the Senate and then through the conference committee with the House.

What sort of feedback about Sarbanes-Oxley's requirements have you gotten from corporate executives?

It ranges all over the lot, including some from those who complain about the cost of putting in a system of internal controls. I do hear from people who say, "I really complained about this to begin with, but now that we've been through it, we think this has served us well and made us a stronger company."

Some officers of publicly traded companies have complained about the cost of complying with the requirements for documenting their companies' internal controls. Are their complaints justified?

There was a lot of concern about the section of the act about internal controls. The Public Company Accounting Oversight Board, which issued guidance on that issue, has revised its guidance to focus more on important matters and to get away from simply checking every box. It's anticipated that this will reduce the cost. It seems to me that to have an adequate system of internal financial controls should be a given for any company, particularly for a public company.

Have you gotten feedback about Sarbanes-Oxley from investors?

Investor groups seem to be happy with it. The Center for Audit Quality did a survey and found a high degree of support for what the act required. We want to be able to assure investors that a public company's financial reports are fair, that they are honest and accurate and that they are transparent so the investor can base their decisions on valid information.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com