Another Sarbox Revisitation

CFO.com reports on a new academic study of Sarbanes Oxley which found that ‘accounting risk’ seems to have risen in its wake (emphasis added):

Nearly seven years ago, Sarbox ended what was once a cozy relationship between companies and their audit firms. Bristled by Arthur Andersen’s collapse and strict prohibitions in the law, auditors quickly stepped back from their clients, withholding accounting advice and isolating their consulting services.

Among Sarbox’s many auditor-independence restrictions: audit firms could no longer provide internal-audit work to the clients they audit. For some observers of the industry, there was no question that keeping the two audit functions separate was preferable, to avoid any appearance of conflict of interest and, effectively, boost investor confidence that had been violently shaken by Enron and the other corporate debacles earlier this decade…

Until now, there’s been lots of talk about how much Sarbox — in particular, its internal-control provision — has cost companies, but little analysis of what benefits the law truly achieved, says Prawitt.

"Of all the services external auditors provided before the SOX prohibition, we believe internal audit outsourcing represents the greatest possibility for creating [a risk of accounting errors]," the academics said in their paper…

Hiring a public accounting firm to provide both internal and external audits, a practice that was banned by the Sarbanes-Oxley Act, actually reduced companies’ accounting risk, researchers claim.

The knowledge of a company that an external auditor gained from internal auditing lowered the chances of publishing misleading or fraudulent financial results, according to preliminary findings by professors at Brigham Young and Texas A&M universities.

…the researchers themselves aren’t advocating that lawmakers reconsider this part of Sarbanes-Oxley. What they do hope is that their research — which is still subject to a peer review process that could take months or longer — will begin a debate about the thought process behind the law, which by all accounts was rushed through Congress. "There was a tsunami that came from the scandals and it didn’t matter what the evidence showed," says Prawitt.

So rushing a law through Congress without sufficient thought process is a bad thing? Let’s refer to that as ‘political risk’, and admit to ourselves that it has hardly been receding in this decade. The rather frustrating implication is that shareholders of public companies have not only had to incur much higher auditing fees and expenses as a result of Sarbox, but that they’re also subject to a greater risk of accounting problems. What is it they say about using good intentions to pave a road???

URLs:

http://www.cfo.com/article.cfm/13111528?f=RegWatch021609