SOX Center

Investors who got a midsummer haircut last week during the Dow’s 735-point drop from 14,000 probably aren’t singing Happy Birthday for the Sarbanes-Oxley Act, which is 5 years old today. But maybe they should be.

If you think last week’s sell-off was bad, recall the summer of 2002. Enron had imploded, WorldCom admitted to fabricating billions of dollars in earnings, and prosecutors were swirling around Tyco and Adelphia. From May 24 of that year to July 23, the Dow dropped from 10,104 to 7,702, a plunge of 24%.

That wasn’t a haircut, or a correction. It was a full-blown crisis. The public, and even the White House, demanded action.

In response, Congress passed the Sarbanes-Oxley Act on July 30, 2002. The law forced public companies to spend much more money having their books thoroughly audited, and it increased the penalties for executives who defrauded investors. Since the bill’s passage and implementation, nervous investors who had yanked trillions of dollars from the market have returned.

USA Today: Sarbanes-Oxley law has been a pretty clean sweep

“A series of accounting irregularities at large companies have deepened public distrust of both accounting and auditing firms.”

This is the opening sentence of a recent editorial in the Japan Times Online, entitled “Auditing Accountability,” that continues, “It is hoped that a bill to revise the Certified Public Accountant Law, now on the Diet floor, will remind CPAs and auditing corporations of the weight of their social responsibility, and help them regain the public’s trust.”

Under the bill as described in the editorial, the maximum duration in which a chief CPA of a large auditing firm could continue to audit a listed company would be shortened from the current seven years to five years, and CPAs who have quit auditing firms would be prohibited from landing jobs at companies they audited, or their affiliates. Additionally, if companies fail to rectify irregularities that CPAs have detected, the latter would be legally required to report the failure to administrative authorities.

Web CPA: Sarbanes-Oxley Traveling?