As the ten year anniversary of the
Sarbanes–Oxley Act (SOX) being signed into US federal law
approaches, Baker Tilly International chairman Jim Castellano has
called for it to be improved and modernised.
Speaking to the The Accountant
Castellano said that while SOX has brought immense
improvements to internal controls and “dramatically” improved
corporate governance, change is still required.
However, changing the law is not as easy as
any additions or changes to the SOX need to be debated and approved
by US Congress.
“When you have a process where you have to go
through months and months and perhaps years and years of debate,
there’s always a risk that the new legislation will be obsolete by
the time it’s enacted,” Castellano said.
He explained that following Enron’s collapse
the US Securities and Exchange Commission (SEC) was determined to
find a regulatory solution that would restore confidence in the
capital markets, however following the WorldCom collapse congress
opted for a legislative solution in the form of SOX.
Looking forward, Castellano said collaboration
between stakeholders is essential for any development of SOX.
“A way of going forward and helping modernise
SOX is by a collaborative relationship between the standard setters
– the PCAOB (Public Company Accounting Oversight Board) – the
legislators who created it and can modify the law and the
[accounting] profession,” he explained adding “If all three work
together, then I think it can mitigate the fact we have a
legislative solution as opposed to a regulatory solution.”
Despite his call for modernisation, Castellano
warned that the ability to ensure integrity is not something that
can be legislated.
“The systems that are in place are in a much
better position to detect fraudulent behaviour. But I don’t think
systems and laws can provide an absolute guarantee that fraudulent
behaviour won’t occur. We can improve our ability to detect it, but
I don’t think we can improve to a point of absolute certainty,” he
Castellano, who is the former chairman of the
Board of Directors of the American Institute of Certified Public
Accountants (AICPA), explained that when SOX was being drafted he
was opposed to the concept that newly created PCAOB would take over
the responsibilities for setting auditing standards for public
companies as opposed to the Auditing Standards Board.
“I still think if there’s one regret it is
that auditing standards for listed companies are no longer set by
the Auditing Standards Board,” he remarked.
“We have a process where auditing standards
are being set by a board where the majority are non-CPAs. The
board, by law, is five members and only two of whom can be CPAs.
You have non-CPAs setting auditing standards, which I think has the
potential to lead to audit standards that are not world class,” he
Castellano also said the change and
modernisation he thinks is required for SOX should not be as
“dramatic” as mandatory audit firm rotation currently proposed by
the PCAOB as a way to improve auditor independence, objectivity and
Whether any changes, “small or dramatic
change”, are needed, Castellano warned it unlikely they will be
made quickly particularly with the “reliance of the political
process”. “You can see how difficult it is to change legislation
just by looking at Europe,” he concluded.