September 2003

Sarbanes-Oxley: Is Reconsideration Warranted?
By Mary Ellen Oliverio

Our federal government has a tradition of reconsidering laws; for example, Prohibition in the 1930s. Many may believe that the Sarbanes-Oxley Act was a brilliant strategy that responded to a serious problem, but is it wise or appropriate legislation for the accounting profession or for our society in the long run?

This question is raised as the events and environment that triggered the act are reviewed at a very general level. A tentative conclusion is that we may not have an optimum structure if the new Public Company Accounting Oversight Board (PCAOB) actually assumes the full authority delegated to it. The extent of involvement by the PCAOB was noted by Floyd Norris, writing in the New York Times when William J. McDonough was appointed head of the PCAOB in April: “Mr. McDonough sidestepped questions on details of the issues confronting the board, including the extent to which it would defer to the accounting industry in setting new auditing standards.”

Expectations for a Profession

Technically, implementation of Sarbanes-Oxley could nearly eliminate self-regulation of auditing. Self-regulation needs to be operationally defined; however, some degree of self-regulation must be the responsibility of the membership if it is to be a “profession.” In the New York Times quote, however, the term is “industry,” not “profession.”

The uncertainty about the status of accounting is nothing new. The Accounting Establishment—the U.S. Congress’ 1977 report of the first major governmental investigation of the accounting field—challenged the acceptance of professional responsibility by public accountants, including an explicit statement that the designation of “accounting profession” did not seem appropriate. That challenge is again reflected in the Sarbanes-Oxley Act.

Shortly before McDonough was officially approved as its chair, the PCAOB issued a release titled “Statement Regarding the Establishment of Auditing and Other Professional Standards.” While the Board has the authority to adopt standards established by others, on April 18 the Wall Street Journal reported the following:
On Wednesday, the new oversight board voted to formally strip the [AICPA] of its authority to set auditing standards, retaining that power for itself. The decision is a further blow to the institute, the accounting profession’s leading trade group.

This conclusion is in sharp contrast to what the first group of SEC commissioners determined at their initial meeting. That first group of commissioners decided to rely on the “profession” for rules and self-regulation.

The Merits of Division of Responsibility

Experts in internal control respect the segregation of responsibilities, and its attendant checks and balances, as a key objective for effective internal control. Such disaggregation of functions seems effective in achieving critical objectives.

In the release noted earlier, it appears that the PCAOB will do it all. Sources for changes to standards and new standards, as stated in the release, will be the PCAOB itself, the advisory group, or “any other person or group [that] may petition the Board and request that it propose a new standard or a change to an existing standard.” Such a statement reflects questionable understanding of a technical matter. Can you imagine a similar listing for a government-sponsored medical research board seeking to improve what it does?

The PCAOB is responsible for oversight, which is a comprehensive and extensive responsibility. Is it wise to combine oversight with the promulgation of professional auditing guidance? As currently structured, the PCAOB would be reviewing an activity that is guided by rules it establishes.

The PCAOB needs to reconsider the wisdom of shifting to itself a responsibility that has been performed by a serious, competent professional group, the Auditing Standards Board. (I have not had any relationship to this board!) The PCAOB, through its critical responsibility for oversight, could then be clearly objective in noting weaknesses in such guidance and in making recommendations for additional guidance from its experience in evaluating the effectiveness of audits.

One Year Later

It’s easy to find support for the Sarbanes-Oxley Act and for stripping the accounting profession of self-regulation. A cascade of unbelievably misrepresented audited financial statements, probationary processes ignored, an unwillingness to consider reform as suggested by a pro bono consultant with solid integrity, the unreconciled comments of a major accounting firm’s CEO, and the failure to be a responsible head of Enron’s audit committee by a professor of accounting and dean—all provided a shocking view of professional behavior. The evidence supported the need for prompt action if creditability in accounting was to be restored.

One year has elapsed since the Sarbanes-Oxley Act was written and approved. At this moment a reconsideration may provide a more reasonable, and more comprehensive, assessment of the optimum balance between what is delegated to the profession and what is the responsibility of the PCAOB. The questions include the following:

Given the complexity of the business world, my position is that an accounting profession that can be trusted is critically important for 21st-century business, and participation and self-regulation by practitioners must not be denied. Redressing the serious lapses of ethical judgments may not be easy, but neither is it impossible.

Mary Ellen Oliverio, PhD, CPA, is a professor of accounting at the Lubin School of Business, Pace University, New York, N.Y.

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