The Effectiveness of SOX Regulation: An Interview Study of Corporate Directors

Abstract

ABSTRACT:This study provides insights on the effectiveness of the Sarbanes-Oxley Act (U.S. House of Representatives 2002) in promoting high-quality financial reporting and good corporate governance, based on interviews conducted with 22 experienced directors from U.S. firms. Our analysis indicates that SOX has positively impacted the monitoring role of the audit committee (board), which directors attributed to the financial expertise and internal control requirements and heightened substantive diligence. However, some considered that an emphasis on financial expertise at the expense of legal expertise and financial markets expertise could compromise the quality of financial disclosures due to a lack of business savvy needed to inform accounting judgments and the standardization of reporting. SOX was also perceived as having led to a formalistic approach to accounting policy decision making by the audit committee and external auditor, as a buffer against litigation. While CEO certification was viewed as having led to heightened ownership and diligence on the part of decision agents throughout the financial reporting decision hierarchy, it was also identified as a source of the costly resource-intensive reaction to SOX. Directors also considered that SOX had led boards to take a narrow focus on financial reporting risk at the expense of strategy. Further, management was identified as being actively involved in the more overt process of initiating and administering the process. The directors' responses also demonstrate some variation in the extent and nature of the role played by the audit committee to resolve accounting disputes, reflecting varying interpretations of law. Participants indicate that SOX has also led to a substantial improvement in the scope, responsibility, and status of internal auditors.Data Availability: Contact the authors.