Sarbanes-Oxley at Age 20: The Work Ahead

In a recent speech given at the Center for Audit Quality in the US, SEC chair Gary Gensler celebrated the 20th anniversary of the Sarbanes-Oxley Act. He began with some history.

In June 1889, the statistician Carroll D. Wright spoke at the Convention of Commissioners of Bureaus of Statistics of Labor in Hartford, Connecticut. Wright, the first U.S. Commissioner of Labor, warned against the abuse of numbers for personal gain. “Figures will not lie,” he said, but “liars will figure.”

Forty years after that conference, in 1929, the stock market crashed. Gensler said that “our country learned all too well what happens when liars figure, eroding trust.”

Ultimately, he added, finance “is about trust. In the depths of the Great Depression, Congress and President Franklin Delano Roosevelt tried to restore that trust, through the first federal securities laws. They started with requirements for public companies raising money from the public. Specifically, these companies had to provide full, fair, and truthful disclosure to the public. Investors needed facts and figures they could trust — figures without the liars.”

Nearly 70 years after those first securities laws were established, “our system, frankly, was breaking down.” After offering noted examples such as Enron and WorldCom – where huge frauds were perpetrated – causing untold financial losses and anguish, he said that “in response to this crisis, 20 years ago this week, President George W. Bush signed the Sarbanes-Oxley Act into law….A central goal of Sarbanes-Oxley was, once again, to restore trust in our financial system.”

The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB), an independently funded board under the regulatory oversight of the SEC.

The PCAOB is tasked with setting enhanced auditing standards. For practical purposes, Congress permitted the then-new PCAOB to carry over existing AICPA standards on an interim basis. “The expectation was that the Board would produce a more appropriate set of standards going forward. Historically, though, the PCAOB has been too slow to update auditing standards.”

As Gensler pointed out, 20 years later, most of those interim standards remain. In May 2022, the PCAOB announced that it plans to update almost all of the remaining interim standards. “I look forward to these critical auditing standard updates.”

In addition, the PCAOB is tasked with inspecting and investigating auditing firms for compliance with auditing standards and, when necessary, bringing enforcement actions. Gensler pointed out that “inspections, investigations, and enforcement are critical components of instilling trust in our capital markets. Under the current leadership, the PCAOB has a chance to reinvigorate its enforcement program.”

According to Gensler, “the work to improve auditing standards, coupled with rigorous enforcement of auditor’s professional and ethical requirements, is essential for investor protection.”

Gensler had much more to say, touching on auditor independence, auditing inspections, investigations, and enforcement, as well as corporate governance and other, related issues. For the full speech and his recommendations going forward, please see | Prepared Remarks at Center for Audit Quality “Sarbanes-Oxley at 20: The Work Ahead”.