The Effectiveness of SOX Regulation: An Interview Study of Corporate Directors
42 Pages Posted: 28 Feb 2013
Date Written: February 26, 2013
Abstract
This study provides insights on the effectiveness of the Sarbanes-Oxley Act (2002) in promoting high quality financial reporting and good corporate governance. We report the results of interviews conducted with 22 experienced directors from US firms. Our results indicate that SOX has had a positive impact on the strength of the relationship between the audit committee and the external auditor, and, similarly, on the monitoring role of the board. In general, we find that post-SOX, directors express greater empowerment and authority of the audit committee, and contrary to the findings pre-SOX (Cohen et al. 2002), directors indicate that audit committees have sufficient financial expertise to provide effective monitoring of the financial reporting process. However, participants also indicated that in addition to the audit committee, management still has some influence in decisions to appoint or dismiss auditors, a finding that is consistent with the perspectives of auditors reported in Cohen et al. (2010). Participants indicate that SOX has also led to a substantial improvement in the scope, responsibility, and status of internal auditors. Although CEO certification were viewed as improving financial-reporting quality, directors tempered what they considered to be the benefits of the legislation with the labor-intensive (over)reaction to SOX on the part of management, the audit committee, and the external auditor that resulted in an excessive loss of time for all concerned, which was driven by the heightened sense of litigation risk. This was compounded by a formalistic approach to accounting policy choice that threatens the accuracy and reliability of accounting disclosures. The increased emphasis on compliance has also come at the cost of appropriate risk management.
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