Harvard Buisness Review and Impact of Sarbanes Oxley

It Inspect in Exercise: The Bear upon of SOX on the Industry 20 Years Ago and Today

It seems that fraud and conspiracy are all effectually us. Buzz words such as "misinformation" and "disinformation" haunt the daily news, and trust seems hard to establish. We are not simply plagued by the need to fact bank check everything, there appears to exist no stop to the fraudulent activity that permeates our order. Unfortunately, just a quick web search highlights several contempo cases of fraud, including:

• United States vs. Epsilon Data Management, LLC, (Docket number: 1:21-cr-00006-RM) is a judgement approved for a deferred prosecution understanding (DPA), on 27 January 2021, regarding Epsilon Information Management LLC knowingly selling consumer data to clients engaged in fraud. The agreed penalty was United states of america$150 million.ⁱ
• United States vs. Facebook, Inc., (Docket Number 1:xix-cv-2184 (DDC)) was an approved settlement betwixt Facebook and the U.s.a. Federal Trade Commission (FTC) for violations of the US Federal Trade Commission Act regarding misrepresentation of how consumers could protect personal data and misrepresentation of how Facebook used consumer personal information. A US$5 billion ceremonious penalty was levied by the US District Court for the District of Columbia. Additionally, the judgement required Facebook to establish an contained assessor and contained privacy committee to oversee compliance with the judgement. The judgements were paid past Facebook in April 2020.ⁱⁱ

And so, 20 years after US Sarbanes-Oxley Human activity of 2002 (SOX), are we any better off? The environment that authors sometime US Senator Paul Sarbanes and onetime US Representative Michael Oxley addressed with SOX does not look like the world we alive in today, especially with regard to technology, which continues to impact our lives at a frenetic step. It is the challenge all lawmakers and practitioners confront: How does one adapt an "erstwhile" law to the new world?

History

The turn of the century saw a proliferation of bad corporate behavior. Complimentary marketplace capitalism had encouraged some to compete unfairly at best and illegally at worst. Technology was on an upward tendency, heralded past the dot-com era, which attracted job seekers and investors alike, only to burst and fall apart by the early 2000s. Fifty-fifty more concerning was a flurry of activity coming from two companies in disparate industries, only a short four years later on the major bookkeeping scandal by Waste Management had occurred in 1998, a scandal that nonetheless ranks every bit the top accounting scandal worldwide.³ Enron, a U.s.a. energy company, and shortly afterward, WorldCom, the US telecommunications behemoth, became hallmark cases that prompted quick action past the U.s. Congress.

As a publicly traded energy company, Enron was devoted to the principal of increasing shareholder value. In the early 1990s, Enron's performance tracked similarly with the Standard and Poor'southward 500 Index (S&P 500), but surged far alee of other companies by 1999–2000, with a 56 pct increase in stock toll in 1999 and an additional 87 percent increase in 2000. This at a time when the S&P increased 29 percentage in 1999 and declined 10 per centum in 2000.⁴ Diverse accounting practices that hid illegal activity within the firm were manipulated by Enron, well-nigh specifically "mark to market." The practice of mark to market, a US Securities and Substitution Commission (SEC)-permissible means of assessing an organization's value, is intended to measure out the fair market value of accounts that fluctuate over time confronting the current market value in order to assess an organization's worth.⁵ For Enron, mark to market place became a means for inflating company value well beyond actual company operation, hiding a shaky structure that led to bankruptcy in 2021. Unlike its successor-in-scandal WorldCom, Enron's audit department, audit board and Arthur Andersen all continued to support marker-to-market accounting and the utilize of various bookkeeping loopholes. Information technology took Sherron Watkins, quondam vice president of corporate development at Enron to bring the issues to light, at the point when Enron declared bankruptcy in Nov 2001, well beyond when the visitor could be salvaged and employee pensions and investor portfolios saved.

Instead of multiple complex and convoluted accounting practices, WorldCom's illegal action occured against a single questionable do by a member of the internal audit group. Swift investigations found the booking of capital instead of expenses for "prepaid SONET," which resulted in a series of indictments and WorldCom's subsequent bankruptcy in July 2002.^{half dozen} The whistleblower, internal auditor Vice President Cynthia Cooper, persisted in getting attention directed at the questionable practise.

The repercussions of the WorldCom fraud did not only impact employee and WorldCom investors. In the late 1990s, the telecommunications industry was dominated by iii major competitors, AT&T, MCI, and Sprint, along with a large number of telecommunication resellers. As companies jockeyed for position, WorldCom's merger with MCI created a head-on battle for the top contenders, one I experienced as master of staff to the regional sales vice president at my company. In a very real sense, my visitor was a victim of fraud, something that not just changed what happened to our company and employees, merely to the industry in general. MCI had been a tough competitor, aggressive in pricing, and that seemed to accelerate with the WorldCom merger. As sales results came in nether the company'south expectations for retaining and growing market place share, results had to be accomplished from the expense side of the ledger, and layoffs became an unfortunate outcome in the belatedly 1990s and early 2000s. As a sales force, nosotros were introspective: Were we not believing enough selling our services? Were nosotros too engineering science oriented and not strong enough with a customer-focused marketing perspective? What about our pricing strategies? Were we holding on to unrealistically high pricing in what seemed to exist an overall pricing freefall? Just later, every bit the investigations unearthed the extent of the scandal, did the actions of Worldcom Principal Executive Officer Bernie Ebbers and his company illuminate a unlike view on what had happened and why we struggled to compete.

"Instead of multiple circuitous and convoluted bookkeeping practices, WorldCom's illegal action was identified confronting a single questionable practice by a member of the internal inspect group."

Legislative Response Through SOX

Both the US House neb, called the Corporate and Auditing Accountability, Responsibility and Transparency Act sponsored by Michael Oxley and the Senate bill, introduced as the Public Company Accounting Reform and Investor Protection Human action of 2002 proposed by Paul Sarbanes aimed at stemming the tide of scandals. Within a few months, the two bills were reconciled, passed and enacted as P. L. 107‒204, which became known as the Sarbanes-Oxley Act of 2002.⁷ Section Three of SOX identified its intent every bit "the Commission [SEC] shall promulgate such rules and regulations, equally may be necessary or advisable in the public interest or for the protection of investors, and in furtherance of this Act, (Public Law 107-204 July 30, 2002 116 STAT 745)" and primal elements included:

• Institution of a public company accounting oversight board under Title I
• Enhanced Financial Disclosures under Title Iv, including the frequently cited Department 404 for Management Assessment of Internal Controls
• Corporate and Criminal Fraud Accountability under Championship Viii
• White Collar Crime and Penalty Enhancements under Title 9

"The list of top-ten account scandals shows that at that place was not a watershed of good beliefs after SOX went into effect."

Conflicting Opinions on SOX

White papers written before long after SOX became constabulary highlighted the incredible cost to business in terms of documentation and evidence gathering to back up the police'southward requirements, however the same white papers have noted the benefits in terms of governance, structure and improved accountability. An article in the Harvard Business Review noted that some executives welcomed the requirements because:

They were thinking non only of protecting stakeholders and shielding their companies from lawsuits, but of developing better information about company operations in order to avoid making bad decisions. ^viii

Ten years afterward in 2012, the debate on how effective SOX had been connected to rage on, with opinions citing the exorbitant costs of data collection and maintenance, while other opinions and white papers heralded the framework of controls as critical structure for corporations to include in their governance model. Notwithstanding about of the list of top-10 account scandals shows that there was not a watershed of adept behavior after SOX went into issue:

1. Waste product Management, 1998
2. ENRON, 2001
3. WorldCom, 2002
4. TYCO, 2002
5. HealthSouth, 2003
6. Freddie Mac, 2003
7. AIG, 2005
8. Lehman Brothers, 2008
9. Bernie Madoff, 2008
10. Satyam, 2009^nine

To Regulate or Non to Regulate: Where Nosotros Go From Here

While the debate rages on about the expense involved in SOX compliance and the degree of empowerment SOX provided to the SEC, it remains clear that there is no widely accepted beneficial issue SOX has provided. I tin can argue that the magnitude of fraudulent acts has macerated in US dollar value since enterprises began to prefer the requirements, and without a doubt, the flurry of pervasive fraudulent activeness past large organizations between 1998 and 2003 was breathtaking. Even so not every system is committing fraud, and, furthermore, the ane-size-fits-all SOX requirements can be overly demanding, especially for smaller enterprises. Also, we no longer live in the early on 21^st century, and engineering science continues to enable audio audit practices and support the SOX data drove and retentivity requirements.

SOX benefits derive from the belief that regulation is necessary to promote and enforce practiced behavior. As i considers the plusses and minuses, the core principle of required regulation must exist accustomed to consider SOX worthwhile. As auditors and gamble management professionals, the residual of appropriate requirements is fundamental. I might fifty-fifty suggest that advisable guidelines, whether regulatory or basic in-house business concern governance is the rallying cry for the audit profession. The following key factors are worth consideration:

• Impact of technology on record retention—When SOX was enacted, the challenges of big data were overwhelming, but that burden has eased with cost-justifiable information warehousing capabilities both in-firm and hosted that provide economically reasonable ways to handle the information requirements.
• "In-line" auditing tools that verify arrangement integrity—Auditing has get less mundane and more consultative, with enabling analytics programs bachelor. While cost-effectiveness needs to be carefully evaluated against vendor application features, the trend toward analytics auditing continues to show promise and shape the future of the inspect industry.
• The concept of monitoring controls, instead of only preventive or detective controls—With the advent of monitoring controls equally a key component to an inspect programme, the power to identify and isolate potential fraudulent behavior in almost a predictive fashion is possible. Furthermore, monitoring controls, with data metrics retentivity, can readily substantiate troubling activity when appropriately applied to cardinal control points in the procedure.

If one concurs that record retentivity, in-line auditing tools, and monitoring controls, particularly automatic monitoring, relieve much of the administrative brunt of SOX, the side by side consideration is whether those practices help reduce the calumniating practices to an extent that benefits the public. For people similar me who have worked almost entirely in regulated industries, information technology may be hard to imagine a world without oversight and fifty-fifty harder to judge whether the oversight is necessary. Organizations falling under SOX or other similar legislative requirements frequently cite the dramatic cases regarding the accounting transgressions in their employee training courses, whether the examples provided are from their own arrangement's history or those of other enterprises. Memorable stories of real-life consequences are viewed every bit of import preventive measures in setting the tone for expected behavior.

"Adventure assessment and audit subject field are keys to deriving benefit from legislative efforts such as SOX."

Actions Are All the same Louder Than Words (Facta Not Verba)

Onboarding and recurring training gear up an of import foundation for employees, simply day-to-day expectations cement the upstanding actions of the business concern for employees, clients and suppliers. If one considers a controlled environment to be a fraud deterrent, then clear expectations backed by controls and metrics continue stakeholders on their toes. Regardless of enterprise size or fifty-fifty specific SOX applicability, all organizations implementing and monitoring a controlled environment with supporting testify can have reward of the construction of common goals and guidelines that document appropriate execution of those goals. In the end, organization size does not matter when it comes to fraud. A fraudulent event, unfortunately, more common that one would suspect, tin can be a concluding accident to a small organisation, potentially more and so than to a big enterprise.

Run a risk cess and inspect bailiwick are keys to deriving benefit from legislative efforts such as SOX. As hazard cess professionals know, it is impossible to cover all vulnerabilities in a timely style. Choosing what is nearly impactful to the business concern and establishing controls against the almost critical areas permit focus and promote effectiveness. Does that require a full-blown risk analysis with 3 dissever lines of defence force? The points can be debated based on the complication of the operations at the enterprise and the caste of regulation nether which it operates. Fifty-fifty with three lines of defense, collaboration to encompass all areas of critical and high risk vs. duplication of sampling, monitoring and evidence collection are commonplace. With growing trends in integrated audits, given the highly technical nature of financial transactions in the 2020s, time and money can be more efficiently managed with audit and outset-line teams working together.

Practise nosotros still need SOX? As my recommended reading list suggests, the debate continues regarding how to manage SOX requirements and what changes might make the law more effective. With the 20^th ceremony of the law, new consideration is underway regarding how it can provide insights into protecting the public in the spirit in which the law was created.

Reading List

• Fanning, T.; S. Ravich; S. Spaulding; "Why a Sarbanes-Oxley Update Is Needed to Protect Our Financial Sector From Hackers," The Hill, 28 December 2020, https://thehill.com/blogs/congress-weblog/technology/531781-why-a-sarbanes-oxley-update-is-needed-to-protect-our-financial
• Blokhin, A.; "The Impact of the Sarbanes-Oxley Deed of 2002," Investopedia, 23 February 2021, https://world wide web.investopedia.com/ask/answers/052815/what-impact-did-sarbanesoxley-human action-have-corporate-governance-united-states.asp
• Wagner, S.; L. Dittmar; "The Unexpected Benefits of Sarbanes Oxley," Harvard Business Review, Apr 2006, https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
• Mahoney, J.; "Don't Forget the Proficient That SOX Has Done," The Wall Street Periodical, 28 February 2018, https://www.wsj.com/manufactures/dont-forget-the-proficient-that-sox-has-done-1519423423
• Drawbaugh, K.; D. Aubin; "Analysis: A Decade on, Is Sarbanes-Oxley Working?" Reuters, 30 July 2012, https://www.reuters.com/article/us-fiscal-sarbox/analysis-a-decade-on-is-sarbanes-oxley-working-idUSBRE86Q1BY20120729
• Clark, C.; "Could SOX Be Better?: Exploring the Benefits and Shortfalls of Sarbanes-Oxley," Academy of Tennessee at Chattanooga, Tennessee, USA, May 2021, https://scholar.utc.edu/honors-theses/294
• Curwen, L.; "The Collapse of Enron and the Dark Side of Business," BBC News, 3 Baronial 2021, https://www.bbc.com/news/business organisation-58026162
• 107^th United states Congress, H. R. 3763 Sarbanes-Oxley Act of 2002, U.s.a., xxx July 2002, https://www.congress.gov/neb/107th-congress/house-beak/3763/text

Endnotes

¹ US Department of Justice, Electric current and Contempo Cases, CIVIL, Department of Justice, https://www.justice.gov/ceremonious/current-and-recent-cases
ⁱⁱ Ibid.
ⁱⁱⁱ Corporate Finance Plant (CFI), "Top X Accounting Scandals," https://corporatefinanceinstitute.com/resources/noesis/other/top-bookkeeping-scandals/
⁴ Healy, P. K.; K. Thou. Palepu; "The Fall of Enron,"Periodical of Economic Perspectives, vol 17, no. 2, Spring 2003, p. 3–26, https://www.aeaweb.org/articles?id=10.1257/089533003765888403
⁵ The Economical Times, "Definition of Marking to Market place," https://economictimes.indiatimes.com/definition/mark-to-market
⁶ Heart for Ethical Organizational Cultures, WorldCom's Bankruptcy Crisis, Harbert College of Business, Auburn Academy, Alabama, USA, xix June 2019,  https://harbert.auburn.edu/binaries/documents/center-for-upstanding-organizational-cultures/cases/worldcom.pdf
⁷ 107^th Usa Congress, P. L. 107–204, 30 July 2002, 116 STAT 745, U.s. Sarbanes-Oxley Act of 2002, https://www.congress.gov/bill/107th-congress/firm-neb/3763/text
⁸ Wagner, S.; L. Dittmar; "The Unexpected Benefits of Sarbanes-Oxley," Harvard Business Review, April 2006,  https://hbr.org/2006/04/the-unexpected-benefits-of-sarbanes-oxley
⁹ Op cit Corporate Finance Institute

Cindy Baxter, CISA, ITIL Foundation

Is manager at What'south the Risk, LLC. Her exercise focuses on integrated risk command and process assessments for cybersecurity, privacy and business organization continuity/disaster recovery. She views risk management and control assessment as a chance to learn the nuts and bolts of a client'southward concern and help them worry less because gaps accept been uncovered and a stronger operating model tin can be built. Baxter draws upon her experience in banking, insurance, healthcare and technology afterward holding compliance and direction roles at State Street Corporation, American International Group (AIG), Johnson & Johnson and AT&T. When she is non doing risk and audit piece of work, she enjoys volunteering on climate and environmental bug that affect her customs.

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Source: https://www.isaca.org/resources/isaca-journal/issues/2022/volume-1/the-impact-of-sox-on-the-industry-20-years-ago-and-today

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