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 said.
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 warned.
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 professional scepticism.
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.