The ideas that back up the Sarbanes–Oxley Act in auditing can be transferred into the banks and investment houses, especially when it comes to launching “hot” IPOs and bond issues. The legal framework for auditing work has now changed in the US post-Enron. “Simply stated, the current status quo for corporate governance is unacceptable and must change.”
The Sarbanes–Oxley Act was passed into law in August 2002. It laid out firm rules:
CEO and CFO to certify company financial statements. It became a criminal offence to make such a certification falsely knowing (and “knowing” is the key word) that the report was intentionally misleading within the definition of the Act.
Enforced rotation of audit partners where the audit partners (the specific persons) have performed full audit services in each of the five previous fiscal years of service.
Prohibition of non-audit services where the accounting firm already performs audit of the client.
Document destruction or alteration now attracts new criminal penalties where the intention is to impede any US government investigation.
Already auditors are being faced with a mandatory change every five years so that they do not get too cosy with the customer as in Enron. The effectiveness of any legislation is governed by roughly the same factors as a successful project. It needs:
1. Scope.
2. Risk monitoring.
3. Enforcement.
4. Performance (i.e. punishment or financial redress).
Sarbanes–Oxley can prove itself particularly potent particularly in the last two factors. An investor can look to Sarbanes–Oxley for some sympathy and support, but will have to search elsewhere for anything close to complete investment protection.