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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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About That "Hasty" Accounting Reform
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Posted by: Jack Ciesielski 2/24/2006 7:40 AM
Critics of the Sarbanes-Oxley Act often charge that the legislation was hastily slapped together after the world-class accounting scandals of 2001 that left investors holding an empty bag. They complain that it was a political move that was meant to make legislative supporters look like they were doing something, anything, to the voters back home. Efficiency be damned! Financial reporting must be cleansed.

No complaint here about clean financial reporting; I'm one of those starry-eyed believers that capital will find its best home (as it should) when there's good information for investors to decide where they want to put their capital. And I'd find it hard to believe that every legislator understood completely every facet of the Sarbanes-Oxley Act as it wended through the halls of Congress; I don't doubt that some voted for it simply because they wanted to be on the side of the angels. (Right answer, wrong reason.)

But "hastily slapped together" is one thing that isn't true. Don't believe me? Check out Broc Romanek's nifty little history of Sarbox from his blog posting of February 23 at TheCorporateCounsel.net Blog. Its roots extend back to legislation proposed after the accounting scandals of the 1970's - Penn Central, Equity Funding, and others - and due to inertia or fateful quirks (death of a key Congressional backer; another backer retired) - nothing happened. Until 2001.

* * * * * * * * * * * * * * * *


While we're on the subject of auditing: Floyd Norris serves up an interesting piece in this morning's New York Times. I recall that back in 2000 - coincidentally, just one year before all hell broke loose - the SEC was trying to increase auditor independence by limiting the consulting services audit firms could perform for audit clients. One of the defenses raised by the audit firms was that by doing the consulting work, the audit firms could do a better job of auditing. Floyd offers an anecdote involving BDO Seidman and an audit client where this just didn't hold true. Check it out here.
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