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July 30, 2012

Francine McKenna in the Financial Times: Sarbanes-Oxley? "It has failed".

Happy Tenth Birthday--and R.I.P.--Sarbanes-Oxley. Publicly-traded companies--their boards, officers, CFOs, lawyers and CPAs--are not likely to forget (1) Enron, the once-admired $100 billion energy company that deliberately deceived its investors of financial conditions and profitability with elaborate and aggressive practices of accounting fraud. Or forget (2) Arthur Andersen, the 90-year-old former "Big Five" accounting firm and Enron auditor that suffered mortal blows to its reputation when it was revealed it had obviously failed to conduct ethical or competent audits of Enron’s financial statements.

Enron and Arthur Andersen quickly became symbols of unfair play. They were not, of course, the only firms in the period 2000-2002 discovered to have committed large corporate frauds that would disappoint, shock and anger both novice and sophisticated investors worldwide. In the U.S., and with the greatest of acclaim and self-congratulation, Congress overwhelmingly passed the Sarbanes-Oxley Act of 2002 (SOX) on July 29, 2002 in large part to ensure accurate financial disclosures, to shut down corporate fraud and to restore investor confidence in audit companies after auditors at giants like Arthur Andersen and other shops failed to do their jobs and mitigate their clients' accounting frauds. President Bush signed SOX into law on the following day, July 30.

Did SOX meet these goals? No, according to Francine McKenna, a well-known Chicago consultant, columnist and "accounting watchdog" who writes re: The Auditors, and who worked for two decades in America and abroad in two of the current Big Four accounting firms. And, as McKenna might add, SOX in the last decade has not even come close in achieving those goals.

So see McKenna's op-ed in the Financial Times this morning: "Ten Years After Sarbox, Time for an Audit of the Auditors". McKenna offers three (3) big reasons Sarbanes-Oxley has been a bust on achieving objectivity in corporate audits. One reason she gives--this is my favorite since I have been seeing this over the last 10 years on an alarming if often comedic scale in the larger accounting firms in one form or another almost every day since the passage of SOX--is that:

audit companies still encourage partners to sell additional services to audit clients. Roger Dunbar, a former E&Y vice-chairman who is now the chairman of Silicon Valley Bank, told a recent forum on auditor rotation: “There’s an increase in scope creep, of wanting to provide these ancillary services to audit clients. I am personally worried. It’s a risk.”

Remember [McKenna goes on], Arthur Andersen had a disproportionate focus on the huge fees it earnt from consulting to Enron compared to the audit.

Sarbox was supposed to eliminate this conflict.

Except for Deloitte, audit companies went back to being primarily auditors after the 2002 act was passed. That trend has now reversed. Deloitte held on to its consulting arm and it has grown ever since. The remaining three Big Four companies rebuilt consulting businesses they sold or squelched.

For the other two reasons SOX (or Sarbox, for you accounting folks) is a failure, see the entire Francine McKenna FT piece at the above link. (As we've mentioned on other occasions, London-based the Financial Times has long been run by brilliant but way-snarky Brits who like you to work for their content; in the case of McKenna's piece, they obviously really like this one and they want you to pay for it.) McKenna's short, reasoned and honest call-to-arms for real auditing reform is not merely refreshing and compelling. It is undeniable. We expect to see the sentences in her SOX tenth anniversary FT op-ed quoted, paraphrased or mimicked in the coming months.


Francine McKenna of McKenna Partners, LLC

Posted by JD Hull at July 30, 2012 11:59 PM


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