How SOX has reshaped corporate responsibility

A decade after passage of the Sarbanes-Oxley Act (SOX), critics complain the disclosure mandate drains U.S. competitiveness. Supporters, however, argue that the law contributes to a more holistic awareness of corporate responsibility across big businesses.

“It is helping extend fiduciary responsibility deep into the company,” said Laralee Martin, executive vice president and chief financial and operating officer at Jones Lang LaSalle, the commercial real estate company. “If there is concern about bad judgment, it can rise safely to the top.

Martin’s remarks came during a debate about SOX and the issue of corporate disclosure this week in New York at the COMMIT!Forum, a gathering of high-level corporate social responsibility (CSR) professionals.

The specific focus of the debate team was on SOX, which dictates policies for independent audits and approval of financial statements at large public companies.

The pro-SOX team included Martin and former U.S. Senator Paul Sarbanes, one of the law’s co-sponsors. The anti-SOX debaters were Mark Calabria, director of financial regulation studies at the libertarian think tank Cato Institute; and John Allison, retired chairman and CEO of financial services company BB&T.

SOX was necessary to create “an indispensible safety mechanism” that has helped boost investors’ trust in the financial statements they reference when investing in public companies, said former senator Sarbanes.

“The law has unearthed systemic problems and nipped accounting problems in the bud,” he said.

Critic Turned Advocate

While Martin was initially very opposed to SOX, she believes the law has helped Jones Lang LaSalle create a far more disciplined set of processes for running and monitoring its financial processes.

That framework has helped the company spot potential issues far more quickly,  helped it manage the costs of internal and external auditors, and enabled it to integrate acquired companies more quickly than in the past.

At the same time, the framework required by SOX has reset the “tone at the top” of the company, helping make executives far more aware of the need for honest and transparent disclosure.

“There is no excuse for management not to know,” she said.

Unintended Consequences?

Calabria counters that SOX is not a panacea for deeper flaws in regulatory policies governing capital markets and the U.S. financial system, and that it has the unintended effect of increasing auditing costs by 6 percent to 7 percent without improving quality.

That’s because SOX requires businesses to change auditors to encourage independent checks and balances, which makes it tough for companies to negotiate better rates. “Auditor independence is not free,” he said.

Tougher disclosure lawshave also discouraged foreign companies from cross-listing their shares on U.S. exchanges and caused some companies to delist their stock altogether, he said.This has hurt investors more than managers, Calabria said.

More Holistic View of Disclosure Needed

SOX introduces another layer of reporting complexity that can cloud disclosure statements and make them more confusing when companies should really be focusing on making them simpler, Allison said.

That can make it tougher for honest CEOs to make decisions, he added.

SOX critics and opponents do agree on one thing: The best CEOs and C-suite executive are paying more attention to honest and transparent disclosure.

“Really good organizations already have a good system in place for this,” Allison said, while arguing that it shouldn’t be mandated.

SOX has accelerated the creation of systems that can be emulated and replicated across a broad range of companies, Sarbanes said.

“Many portions of the law have become best practices, which has reached out into other parts of industry — even where it is not required,” he said.

Image of U.S. Capitol in autumn provided by Orhan Cam available via Shutterstock.