The 2002 Congress passed the Sarbanes-Oxley Act, which required public companies not just to have internal controls against fraud — something by law they had to do since 1977 — but through its Section 404 also mandated them to report on whether they maintained these controls.
As a board member who often chairs governance sub-committees, I have used Sarbanes-Oxley as the gold standard not just to guide procedures of for-profit but also of not-for-profit organizations. While the latter were not covered under Sarbanes-Oxley, I have advocated that non-profits who followed its guidelines would be at the cutting edge of best practices in good governance. A New York Times article by Floyd Norris “Goodbye to Reforms of 2002” describes how congress already has substantially gutted Sarbanes-Oxley over the years and now plans to further remove most of its teeth.
The bill also provided through the Public Company Accounting Oversight Board for regulation of the accounting industry, which had proven to be greatly flawed in self-regulation. It also reinforced the independence of The Financial Accounting Standards Board that writes US accounting guidelines. Congress, under constant lobbying by representatives of businesses and their bankers with vested interest in not revealing their activities, has been constantly chipping away at these protections almost since they were put in place.
I share Arthur Levitt’s sense of dismay that lawmakers — this time led by Democrats fearful of being seen as anti-business – are attempting to further dismantle the few protections that remain intact. As our nation and the world are just barely beginning to recover from the worst recession since the Great Depression, the American Bankers Association has the audacity to claim that it was not the failures of highly risky, complex, unregulated financial instruments nor the banks not measuring the market values of these toxic securities that caused the cascading collapse of the global economy. Incredulously, they claim it simply was the need to disclose losses that was the cause.
The House Financial Services Committee just approved an amendment to the Investor Protection Act of 2009 — in Norris’ words, “a name George Orwell would appreciate” — that further seriously watered down Sarbanes Oxley. Now one of its sub-committees is trying to take away any remaining force of Section 404 by exempting even more companies from the need for compliance. This is a terrible set-back for the transparency we vitally need to protect not just investors but everyone as all are affected by the consequences of unregulated, largely unknown financial activity and its myriad negative ripple effects.