Representative Michael Oxley has garnered both fame and blame since coauthoring the Sarbanes-Oxley Act, the now three-year-old corporate governance initiative. On the fame side, the chief financial officer of a midwestern company asked Oxley to autograph a pair of tube socks -- a play on SOX, the acronym for the law. As for the blame, Oxley recently admitted that while "nobody ever passed a perfect piece of legislation . . . this one has been quite a ride."
An Ohio Republican, Oxley spoke at an October conference in Atlanta about the law he penned with Senator Paul Sarbanes (D-Maryland). The seminar was sponsored by McKenna Long & Aldridge, KPMG Inc., and Computer Associates International.
Oxley said that if he could change one thing about the law, he'd make it more flexible, especially in relation to how section 404 applies to small and midsize companies. The provision, which requires all public companies to conduct an audit of their internal financial controls, has already cost millions at the large businesses that had to comply with 404 this past spring. The impact is expected to be even greater when smaller companies have to start conducting internal control audits next year.
"I think it's a legitimate criticism of the act, and especially 404, that it's a one-size-fits-all solution," Oxley said. Section 404 has gone "far beyond" its intended application, Oxley said, and the Securities and Exchange Commission could be more flexible in implementing it. "It would be a shame if the law were to force [smaller companies] to go private and deny them access to capital they need to grow," he said.
But Oxley warned that Congress rarely revisits major legislation, and noted that it took about 70 years for the Glass-Steagall Act to come up for review. The Glass-Steagall Act, enacted in the wake of the stock market crash of 1929, separated investment and commercial banking activities. It was repealed in 1999.
Aside from the excessive reach of section 404, Oxley said the biggest mistake attributable to SOX was "the death sentence for Arthur Andersen [LLP]." Less competition among auditors "by definition drives up the costs" for companies that use their services, he said. "We essentially have created an oligopoly among what I call the Final Four [accounting firms]."
In what Oxley--a lawyer--referred to as his "closing argument," he defended the original goals behind SOX: increasing penalties for corporate fraud, boosting investor confidence, promoting transparency in corporate governance, and preventing debacles like the ones that happened at Enron Corp. and WorldCom, Inc. Still, he admitted that no law can guarantee that there will never be another fraud scandal. "Will it happen again?" he asked, then answered his question: "We have laws against murder, but people get murdered every day."