Speech by SEC Commissioner:
Remarks before the SIEPR Economic Summit: Assessment of the Sarbanes-Oxley Act Critical Issue Session
Cynthia A. Glassman
U.S. Securities and Exchange Commission
February 11, 2005
Thank you Mark. I appreciate the invitation to participate in this Summit and I have certainly enjoyed the earlier panels and speakers. I also look forward to the remarks to be shared on this panel and especially the Q&A session. As an SEC Commissioner, I very much want to hear from those of you out there "in the trenches," so I strongly encourage you to share your thoughts. Before I go any further, however, I need to give our standard disclaimer, which is that the views I express here today are my own and do not necessarily represent the views of the Commission or its staff.
Since the title of this panel is an "Assessment of Sarbanes-Oxley," I would like to set the stage with a brief overview of the climate and events that produced one of the most sweeping corporate governance reforms in history and led to the Sarbanes-Oxley legislation. What many may not realize is that certain of the core corporate governance reforms ultimately included in Sarbanes-Oxley were recommended by the SEC and President Bush's Ten-Point Plan to Improve Corporate Responsibility prior to the July 2002 enactment of SOx. While I believe certain of these reforms likely would have been implemented by the SEC even without SOx, it is undeniable that the scandals and climate focused Congressional attention on the problems and broadened the scope and certainly accelerated the timing of adoption of the reforms the administration and Commission had been advocating and proposing.
I am not going to dwell on the background, as you know it all too well. Starting in the mid-90s, we experienced the period Alan Greenspan referred to as "irrational exuberance," fueled in large part by investor interest in the entrepreneurs and dot.coms right here in the Silicon Valley. We saw retail investors participating in the markets as never before, each trying to get a piece of that next hot IPO. Unfortunately, beginning in the second quarter of 2000, the bubble burst, IPOs dried up, companies were being delisted left and right, and a new round of class action suits began.
It was in this period of shock and loss that we began to learn that some of the most successful companies, so we thought, were no more than a house of cards built upon a free-wheeling, "do whatever it takes" mentality to beat, or even just meet, the street's forecast of earnings per share for the quarter. The names Enron, WorldCom, HealthSouth and others became synonymous with fraud. In the end, we were left with investors filled with distrust and anger, and securities markets that resembled tires with the air let out of them -- a state of affairs completely contrary to the SEC's mission and goal of protecting investors and maintaining the integrity of the markets.
It was in this environment that I joined the Commission in January 2002. Very soon afterward, I became swept up in a flurry of proposed reforms expressed in the President's Ten-Point Plan, announced in March 2002 and in which the Commission was actively involved, as well as the numerous initiatives put forth by the Commission itself. I have put together a chart (see the Exhibit), distributed to each of you today, detailing these regulatory initiatives and proposals, many of which arguably served as a basis for, and were ultimately codified in, Sarbanes-Oxley. As you can see, five general themes or goals of needed reforms developed. I will discuss each in turn.
First was restoring confidence in the accounting profession. In June 2002, the SEC proposed a new, independent regulatory board which would require registration of any auditor of a public company. Inherent in the SEC's proposal was a recognition that certain deficiencies in the then-existing system of oversight of auditors, including peer review, contributed to the decline of investor confidence in financial information and the integrity of audits. At the time, the Commission called this new body a "Public Accountability Board." As codified by SOx, it became the Public Company Accounting Oversight Board, an organization that, as we originally proposed, is overseen by the SEC.
A second theme was improving the "tone at the top" of public companies. I have heard repeatedly of the collective looks of disbelief that occurred when, during the Congressional investigation of Enron, Jeff Skilling stated that he was 'simply' the CEO and not responsible for Enron's financial statements. Statements like this were a catalyst for the officer certifications required pursuant to SOx, a reform previously recommended by the President's Ten-Point Plan that called for CEOs to personally vouch for the veracity of their companies' financial statements. In June 2002, the SEC proposed that the principal executive and financial officers certify, on a going-forward basis, as to the accuracy of the information included in a company's annual and quarterly reports. Also in June 2002, prompted in part by the WorldCom announcement of its pending restatement due to the fraudulent inflation of its earnings by several billion dollars,1 the SEC ordered the principal executive and financial officers of the largest 947 public companies to certify, on a one-time basis, the completeness and accuracy of their companies' most recent financials. The certification requirement was then incorporated into the Sarbanes-Oxley legislation.
Third, we focused on improving disclosure and financial reporting. Beginning in December 2001, the SEC issued a series of statements regarding the use and disclosure of pro forma financial information, off-balance sheet arrangements and the effects of transactions with related parties. In June 2002, the SEC proposed amendments to Form 8-K to increase the number of "presumptively material" events requiring the filing of the form, as well as shortening the time period for filing. These initiatives were further codified in SOx under its provisions relating to off-balance sheet arrangements and non-GAAP measures, as well as requirements for disclosure, on a "rapid and current basis," of material changes in a company's financial condition or operations.
A fourth goal was improving the performance of gatekeepers. In addition to the SEC recommendation to establish an independent regulatory board to oversee the auditing profession, beginning in March 2002 the SEC commenced studies into the activities and effects of rating agencies in the capital markets, as well as the practices of analysts and the conflicts that can arise in the securities industry. These studies provided the basis from which we conducted a SOx-mandated study on credit rating agencies as well as SEC approval of new rules relating to analyst conflicts of interests proposed by the exchanges and Nasdaq.
And finally, enforcement tools were enhanced. The Ten-Point Plan, with the backing of the SEC, clearly called for an expanded focus on removing corporate officers who proved their unfitness to serve in leadership positions. Through the Corporate Fraud Task Force, established by the President in July 2002, the SEC began working with the Department of Justice and other governmental agencies in ways unprecedented to investigate and charge fraud. Congress responded to inter-agency requests for assistance in this initiative, with numerous provisions under SOx intended to enhance enforcement capabilities, including lowering the standard for imposing officer and director bars and increasing criminal penalties.
To wrap up these introductory remarks, I want to note that, as I advocate with all of our rules, I believe it is important to look back after a year or two to assess whether the rules are accomplishing what they were intended to, in the most efficient and cost-effective manner. With respect to SOx, I am particularly sensitive to the concerns that have been raised regarding the costs and burdens of implementing 404 -- management's assessment of, and the auditor's attestation, to internal controls over financial reporting (in case you have forgotten!). I strongly encouraged, and am pleased that we are proceeding with, a roundtable discussion of 404 in April, as we announced earlier this week. However, I certainly do not believe that problems with one provision of SOx should drive the judgment of the whole. It may be too early to truly be able to assess the costs and benefits of SOx, especially when one of the final provisions has not been fully implemented, and the main intended benefit, restoring investor trust, will take time to be fully realized. However, programs such as this, as well as our planned roundtable discussion in April, provide an excellent forum in which to raise and assess the costs and benefits, as well as to suggest ways in which the rules can be fine-tuned, as necessary, to be more efficient and cost-effective. And, with that, I look forward to hearing from both Carol and Joe regarding their perspectives on Sarbanes-Oxley and where we are today. Thank you.