Ernst & Young Americas vice chair of assurance John King discusses the impact and history of the Sarbanes-Oxley Act, one of the most influential pieces of financial legislation of the past 50 years.
Transcription:
Dan Hood: (
Welcome to On the Air with Accounting Today. I'm editor-in-chief Dan Hood. You know, it's been 20 years since Congress passed the Sarbanes-Oxley Act and SOX has been such an integral part of the landscape for so long that it's easy to forget that. At one point it was a serious revolution. It made executives personally responsible for the company's financial statements. It created the public company, accounting oversight board to regulate the auditing profession. It created strong protections and conflicts of interest, and a lot of other things it's really, really had a major, major, major, major impact on the auditing profession and on the capital markets as a whole. Here to talk about all that — about SOX, it's impact on the markets and on the profession — is John King. He's the Americas vice chair for assurance at Ernst & Young. John, thanks for joining us.
John King: (
Daniel. It's great to be with you.
Dan Hood: (
Excellent. Well, you know, given the circumstances at the time there had been some serious corporate shenanigans, let's call it, at places like WorldCom and Enron. Do you think Sox or something like it was inevitable? Was it gonna happen no matter what?
John King: (
You know, it's a great question. In hindsight it seems clear that something like it was inevitable. As you say, there was really a string of very high profile accounting and audit failures. And so intellectually we'd have to know that there would be a strong response, but I'll tell you at the time, as someone practicing in the field, I remember how it felt and it felt disorienting. Seeing your work and the work of your colleagues across the headlines every day was just something we weren't used to. And that impacted so many folks in the profession. You know, at the same time, it reminded us of how central the work we do is, and that it's not just detailed technical work that occurs in some back room, but it impacts the lives of people, people who are saving for college or for a house or for retirement. And so in that way, I think it really reminded us the importance of the work we do
Dan Hood: (
Right well, and which is, uh, it would be, would've been nice to have been reminded under different circumstances, but it is a good reminder to know, right, how important, uh, uh, the auditing profession is and its role in the markets and keeping people, um, comfortable with the assertions of companies and that sort of thing. Now, you, you talk about it being disorienting, right? To see, um, uh, auditing and auditing firms mentioned sort of negatively in the headlines as connected with all these, uh, sort of issues going on. I'm wondering, uh, did you have a take on Sox on when they first started getting proposed people talking about this is what they're gonna do in response to these issues? What was your first thought on it? Did you have a sense of how big an impact it was gonna have?
John King: (
Well, I think it would be hard. Uh, it, it, it, would've been hard at the time to have not understood. This was really a transformative moment, you know, so many elements of socks and you, and you listed out some of the really key ones. One of those is going from a period of decades and decades of self-regulation to, to a period of being regulated. And that drove a tremendous cultural shift, uh, in the profession. I also remember how much work it was not only for the accounting firms, the audit firms, but for our clients and how many people were really, uh, uh, placed into service in doing all the different things that Sox required in particular, the internal controls reporting and the auditing of that. But I'll tell you, it, it, would've probably not been possible to understand in the moment, uh, the long term impacts of socks and how in the 20 years, since it's enactment, how it's really changed the entire financial reporting ecosystem. So I, you know, we had a sense of it. We certainly had a sense of the magnitude, but the long term impact, the, the long term positive impact on the markets. Uh, I don't know that anyone fully understood that at the time.
Dan Hood: (
I, you know, it's one of those things where it's hard to project that out, particularly as you say, coming from a period well, of self-regulation and of, of accountants not being at the forefront. I mean, their role we always know is crucial, but it's very, seems like a backstage role. Um, so it's, uh, it would be hard to have predicted it, but you talked about now you mentioned the enormous impact. Let's dive a little bit into that. Talk about, uh, you know, the impact you think it's had on the, the AR the, uh, financial reporting ecosystem and, uh, on the capital markets,
John King: (
You know, Dan, you started out right by talking about all the different elements of SOS. And, and I would view it as a, a really a holistic, uh, approach, uh, everything from strengthening the independence of, of the audit to requiring independent audit committees, uh, enhancing executive accountability, and certainly the PCO B and, and these things that we just take as table stakes. Now, uh, it's important to remember in some ways how unique that is in our system as, uh, when we look around the world, the strength of the us financial important ecosystem is something we ought be really proud of. SOS underpins a, a great deal of that. You know, when you look at various elements, there's, there's things to observe in every piece of it. One of those is the importance of the P C Oob and what independent oversight has meant to the profession, how it's driven, audit quality.
John King: (
That's something of incredible importance. It continues to have really positive impacts going forward. It's also important to remember things that we don't talk about as much about the key protections for whistleblowers, that socks, uh, brought to the fore and, you know, requiring audit committees to have, uh, procedures and access points for whistleblowers. That's something that we, again, just take as a basic or as a table stake today. That's incredibly, uh, important. You know, the, the last thing I'd say is that when you look at all the different elements of socks, uh, they are mutually reinforcing all these things create kind of a virtuous circle that really creates a strong, a disciplined, uh, ecosystem. And again, when we look around the world, there's a lot of systems to admire and, uh, focus on different elements. But I think Sox has uniquely brought those together, uh, to strengthen the system in, in the United States.
Dan Hood: (
Well, it's, you know, it, uh, one of the things I find fascinating about any kind of look back like this, it's hard to imagine a universe that doesn't have a public company, accounting oversight, board looking, you know, regulating auditing firms. And it's hard to imagine that there was a time when that wasn't the case. It's also hard to imagine implementing, think about implementing a law this big now, right. Is huge. And, uh, there was, I'm gonna add one of my, one of my favorite jokes about it was that it was some people had renamed it, the no accountant left behind act, because particularly when it was first launched, there was tremendous, uh, both internal and external, um, efforts that had to be made. Companies had to set up their internal controls properly and all sorts of all sorts of questions people needed, answered about it.
Dan Hood: (
And it was, uh, um, while it was also, it was a huge burden for accounting firms to, to get up, to speed on this and to build the systems and to give the advice that they needed to it also for a while was a big, a big business opportunity. I, it still remains that, but I don't think on the same level as it once was. And I'm curious if you have a sense of that, that transition from a point from, you know, how, how has, how has let's put it this way? How has the impact of Sox changed a little bit? I'm taking this off into a slightly different direction I realized, but I'm curious about it because there was that period of ramping up getting into it, getting it, uh, getting corporations set for it, getting, uh, uh, audit committees, understanding their responsibilities, building, literally setting up the, the P C a Oob and finding people to staff it and determining how it would do its, um, uh, its inspections, all that sort of stuff had to be set up. And then you have a period of, of, of getting it out into the markets and seeing what it means and then getting it settled. Do you have a sense of that progress of how that's worked over time?
John King: (
You know, it's a, it's a great question. I, I think, um, you know, we're at a point of real maturity as we look at, uh, all the different elements of survey Oxley and how they interact with the different parts of, of the ecosystem. There's always work to go. There's always improvement. Being made. Evolution is occurring as we go. You know, when I think about, uh, SOS, I think about, uh, various elements of it and, and the relative impacts they've had on the ecosystem and on the profession. And, you know, and they've all had an impact of, of one type or another, you know, when I, if I were to just to sort those on basis of magnitude, you'd have to look at the intro and control reporting as being really significant, significant for companies significant for firms, certainly significant to folks undertaking a career in, uh, in the profession.
John King: (
This is now a part of almost everyone's experience. It's had, uh, demonstrably positive effects, but that, that was hugely, uh, a huge part of the overall, um, uh, formulation, you know, CEO and CFO, accountability, you know, the required reporting on, on an annual basis, certainly on a quarterly basis. That's something, again that we just don't think about much anymore because it's part of our fabric, but at the time was pretty revolutionary. And, you know, know the, the, uh, amount of work that, that has driven back into companies has really focused the, the, uh, uh, minds and attentions of the most senior officers in a company. That's something that of real importance I've talked before about the P C Oob the cultural shift that that's driven, how the P C Oob has driven, uh, audit equality across the profession, across the firms, uh, is something that, you know, no one really understood at the time, again, we had been through 50 or 60 years of self-regulation and that was a massive shift.
John King: (
You know, auditor independence is something I I'd also talk about. Again, we accept today that we have a very, um, well established system of auditor independence. You know, we've got, uh, certainly non audit services. We have audit committee pre-approval, we have, uh, mandatory, uh, rotation of, of senior partners and all partners on engagements. That's incredibly important. Again, we accept that as just how it works, but when we look around the world, we understand that it's really, uh, a best in class, uh, kind of system, uh, which isn't to say that it's perfect or that it has achieved every goal, but it has been effective in, in achieving many. And, you know, there's always opportunity to improve that, but it's, uh, um, as you say, the, the impact in both a practical and a broad sense, um, has been really significant.
Dan Hood: (
Yeah. It's yeah. You know, to, to go through all the different, um, provisions of that, it is impossible really to choose one that's, um, that's the most important cuz they are, they self reinforced, as you mentioned. Um, and each one has a different impact. You know, obviously the impact, the, the provisions about audit committees have a much bigger impact on audit committees than say the establishment of the P C Oob, but the P PCOB has tremendous impact on auditors. And then there's the impact on, uh, uh, corporate management. And so all that sort, it is a hugely far reaching bill with tremendous, I shouldn't say bill act with, uh, tremendously replica, uh, ramifications for everybody involved in the ecosystem. And each one of them will point to their individual piece and go, well, that's clearly the most important. Um, I do wanna dive though into the ones that are clearly the most important for auditing and accounting, uh, in a couple of seconds. Um, but we're gonna take a quick break before we do that.
Dan Hood: (
All right. We're here. And we're talking about Sarbanes Oxley it's history, where it came from, what it's, uh, it's impact, uh, with John King of EY, who's been sharing, uh, a lot of fascinating, uh, reminiscence, but also, uh, analysis as of how it's, uh, impacted both the profession and the financial ecosystem. I wanna dive a little bit into, uh, some of the specifics about how it's impacted accountants specifically. Uh, we've talked about the establishment of the P C O B and how important that was and the shift from self-regulation I think, um, uh, it, it, it's very difficult for people to imagine a world where accountants, uh, and auditors in particular were, were regulating themselves since the PCA B's been around long enough. It's well, fairly well established. Uh, we've seen a number of different, uh, leadership teams go through it. So it really is, is pretty well grounded.
Dan Hood: (
One thing I, I, I always like to throw this out as, uh, when people talk about Sox, is that it's easy to forget that right after Sox, um, a number of the largest firms, uh, some of the big four firms, the, the conflict of interest questions were such that a number of them actually, uh, either, either, uh, sold off or, uh, merged out their, their, uh, consulting agencies. And it's hard to imagine how huge those were and what a big shift that was. Now, this is just a way of giving people a sense of the impact that it had on firms. Uh, it's hard to imagine a, that big, a, a change as a result of legislation, but that's the sort of scale of things we're talking about. Maybe we talk a little bit about how, how you think it's changed auditing and auditors. Uh, you know, how important the change from, uh, self regulation to external regulation has been, you know, what kind of impact it's just had on the, on, on the auditing profession,
John King: (
You know, it's the impacts are far reaching. And so when you, you know, I think about it, uh, through the lens of someone really just starting the profession and what their experiences are. And, you know, when I started the profession, it, you know, we did a lot of different things. Our experience was varied. We didn't spend a lot of time on controls. We certainly understood those, but, you know, we went to, you know, what we would refer to as the substantive parts of the audit, we learned a lot of different things, but it was a different and probably less, uh, systematic learning process. Whereas now, as we come into the post SOS world and we think about internal control reporting, being so key to, um, you know, so many audits, that's a discipline and a learning that, uh, most of our people have almost immediately.
John King: (
And they come out of that process with a real understanding, a real framework, uh, to look at all types of business process, all types of auditing questions, accounting questions, that's something, uh, of real value, uh, for sure, for sure. You know, when you look at the other parts of Sarbanes Oxley and the strength of various parts of the ecosystem, the experiences are just different strong, independent audit committees, the oversight they provide, the perspective they provide, how they, uh, oversee independent auditors. That's incredibly important. It's an important part of, uh, the education in the development of our people and, and something that's incredibly, uh, important. So, you know, however, if you look at it through the experience of our people, the experience of companies, uh, that, uh, are audited or the experience of other actors in the ecosystem, the reality is it has shaped the experience of every actor in the ecosystem and we'll continue to
Dan Hood: (
Well. Yeah, and it cuz it really it's, uh, it was so comprehensive and touched so many people. Um, do you have a sense of the talking a little bit about, we've mentioned a number of times the shift from self regulation to external regulation. Um, uh, and that's obviously been, been pretty critical. I mean, this is, you say 50, 60 years the profession, um, maintaining itself or looking after itself, uh, how do you think that's changed the auditing profession or auditing firms as, uh, do you know, has it ma obviously it must have had a significant impact? I can only imagine. Maybe you can describe that a little bit.
John King: (
Yeah. Without question, the impact has been significant. And, and it's beyond question it's been very positive. You know, I think the existence of the P C O B and how the various leadership teams have, uh, undertaken their responsibilities and their duties, uh, has been very positive. It's push firms to get better. Uh, it is, uh, even though there are always things to improve. The quality of audits today is the best it's ever been. And with a direct line of sight to improving that that's clear, that's clear. And so, um, you know, I think self-regulation certainly had a place, but there is no substitute for independent regulation in terms of driving improvements, driving investments in people, investments, uh, in technology and, and, uh, continue to get ahead of the curve. And that's, you know, what I think we, we see with the firms that are regulated by the P C O B, it, they, they have an essential role that they undertake very, very seriously, but I would have to tell you, uh, it's one that we view collaboratively in terms of everyone wants the same thing in terms of, of, uh, you know, high quality audits and their perspective, uh, is an important one that we, that we consider very, very seriously.
Dan Hood: (
Yeah. You know, there can be no question, as you say, when, uh, when the, when the, uh, P PCOB is pushing forward, right. It's bringing, it's helping the profession achieve what it wants to achieve. Right. It's, uh, everybody's getting better in the course of that. Um, and that sort of brings me to my last question. Yeah. You've, you've mentioned a couple of times, um, about the, um, uh, what it's called the, the, the sort of world leading quality of, of American regulation and American auditing anding, American capital markets and all that sort of stuff, and the, the way in which, um, socks and its various provisions under underpin that. So I'm, I think I'm gonna know the answer to your question to this question before I ask it, but I'm, I'm just curious how you would rate socks overall.
John King: (
It, it, it, it's a great question. And, and I think it's hard, as I said before, it's hard to overstate its impact and how broad reaching it's been by design and, and in its operation. And so, you know, from my perspective, it has clearly improved, uh, the ecosystem. Uh, it has clearly improved the performance of so many different actors, uh, in the ecosystem, not to say it's perfect and not to say that every piece of it has been implemented in the way that it was designed. I think it continues to get better. I think it continues to be evolved. Um, and you know, I think every time that's done it, it improves, uh, the, the ecosystem I've talked, uh, a few times about reforms around the world. And, uh, without exception, they do look at socks as at least at a reference point, as they look at reforms and improvements that, um, you know, uh, are made in various jurisdictions.
John King: (
Sox is always in the discussion not to say they always adopt it, but it's certainly a reference point. So I think we have to accept that of something to be proud of and something to continue, uh, to improve and to, to get better. You know, when we think, uh, at our firm about what our role is in serving the public interest, it is so aligned with what SOS, uh, laid out and so aligned with those pillars. And so for us, it has been enormously important and enormously helpful as we continue to, uh, uh, cultivate a culture that that is, uh, uh, all around that purpose. And so we, uh, we continue to feel very, very good about it.
Dan Hood: (
Excellent. I'm gonna take a slight tweak on that question, which is, and this is a little bit of a historical perspective, but do you think it's, it's achieved what the legislators, uh, uh, hoped it would that's, uh, Paul Sarbanes and Michael Oxley, I should say for the historically interested, those are the two, uh, the two legislators who, who put it together.
John King: (
It has certainly achieved a lot and I don't want to get, uh, into their minds about whether it has achieved everything, but it has achieved a lot there's potential to achieve more. And, you know, when you look at it from where we were to where we are now, it's, it's, it's hard to fully conceptualize the difference and the improvement, but again, there's always room to improve. I think that's part of the public dialogue today, public discourse. And I'd agree with that. There are opportunities for improvement, but, uh, but we've got to accept and celebrate how much improvement we've already seen.
Dan Hood: (
Excellent. Well, that's a great, uh, a great note to end on cuz it is, uh, as you say, it has, uh, had a tremendous positive impact on, on the markets, on the auditing profession, on companies, on investors and so on any, uh, any final thoughts before we go,
John King: (
You know, the, the, the one thing I always tell people, one of the great parts of my role is I get to visit with many groups, including young people who are thinking about, you know, what they should do with their professional lives is, um, you know, what I talked about at the beginning, this profession is incredibly important and it is important. Not only the detail work, we do, the clients we interact with, but remembering who our ultimate, uh, client is, which is the investing public and what we do matters a lot. And it matters to a lot of people, whether you're saving for college or saving for retirement, the work we do has a huge impact. And I always tell people to remember that it's easy to get caught up in the day to day. It's easy to focus on what's in front of you, but just remember what you do matters. And we ought to be proud of that.
Dan Hood: (
Absolutely always worth remembering, uh, on a great, great final point. John King of Ernst & Young, thank you so much for joining us, and thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Kevin Parise. Rate and review us on your favorite podcast platform and see the rest of our content on accountingtoday.com. Thanks again to our guest, and thank you for listening.