At 10-Year Anniversary of Sarbanes-Oxley Corporate Governance Is Stronger, Audit Quality Has Improved: Ernst & Young

The passage of The Sarbanes-Oxley Act (SOX) ten years ago dramatically transformed US financial reporting by improving audit quality and strengthening corporate governance. Ernst & Young LLP has released a report – The Sarbanes-Oxley Act at 10 – that considers the legislation, discusses what it was designed to do, and analyzes its impact.

SOX ended more than 100 years of self-regulation and established the independent oversight of public company audits by the Public Company Accounting Oversight Board (PCAOB). Designed to enhance the reliability of financial reporting and to improve audit quality, the Act shifted responsibility for the external auditor relationship away from corporate management to independent audit committees, which are responsible to shareholders.

“At this anniversary, it is important to acknowledge one of the greatest successes of Sarbanes-Oxley: the alignment of the interests of shareholders, with independent audit committees, audit oversight authorities and auditors,” said Steve Howe, Americas Area Managing Partner for the global Ernst & Young organization. “Increased transparency is critical to improving audit quality, maintaining investor confidence and ensuring the strength and competitiveness of US capital markets.”

While portions of the legislation – such as Section 404 – have been criticized, many of these concerns have been addressed through a series of regulatory and legislative actions. As a whole, the Ernst & Young LLP report indicates that SOX has afforded substantial benefit to investors and US capital markets:

- Audit quality has been improved by stronger alignment of independent auditors, independent audit committees, independent audit oversight authorities and public company shareholders. In a 2008 audit committee survey reported by the Center for Audit quality, 90% of audit committee members surveyed said that “they work more closely with the independent auditor” post-SOX.

- Audit quality has improved because of PCAOB inspections and standard setting.As of December 31, 2011, over 2,000 audit firms from more than 80 countries were registered with the PCAOB. In 2011, the organization conducted inspections of 213 registered audit firms, and initiated an interim inspection program for broker-dealers.

- More audit committees have financial experts. In 2003, only a small number of audit committee members were financial experts. Today, almost one-half of all audit committee members are identified through proxy statement disclosure as meeting the definition of a financial expert.

- Companies that comply with all of the internal control provisions in SOX are less likely to issue financial restatements. A November 2009 study published by Audit Analytics found the rate of financial restatements was 46% higher for companies that did not comply with all of the SOX internal control provisions.

- Corporate governance is stronger. Prior to SOX, the process for the selection and assessment of the independent auditor typically was controlled by management. Audit committees now play an essential role in corporate governance framework by overseeing the quality and integrity of company financial statements.

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, with 152,000 people. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.

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