Ethical Guidance and Constraint Under the Sarbanes-Oxley Act of 2002

Abstract

This article discusses two key features of the Sarbanes-Oxley Act, which was enacted in 2002 to restore integrity and public confidence to the financial markets. The law was passed in response to the horrendous corporate disasters that had occurred, including Enron, Worldcom, Adelphia, and Tyco. The implementation of effective business ethics became essential and the new law required the publication of corporate codes of ethics. It did not mandate their content. This paper suggests specific sections for inclusion in the general guidelines to encompass the ethical dimensions of the Act. It analyzes the compliance by the corporations in their public filings since Sarbanes-Oxley became law. The revelation of the size of the audit and accounting fees paid to Arthur Andersen by Enron and similar fees paid in other current financial debacles lead to another key requirement of Sarbanes-Oxley: mandatory auditor rotation. Here, however, Sarbanes-Oxley did not go far enough. The law required rotation only of the lead auditor within a firm. This paper submits that it should have required rotation of audit firms instead. The positions of the public companies, the American Institute of Certified Public Accountants, the Government Accountability Office, and accounting journals are explored as to the rotation of auditor firms regarding audit-partner rotation within a firm. The paper concludes that Sarbanes-Oxley should be expanded to require audit-firm rotation. This expansion is necessary to reinforce the independence of the public accountant, both in fact and appearance, and to restore competition within the accounting profession, which will benefit the investing public. It is up to the Security and Exchange Commission and the Public Company Accounting Oversight Board and, ultimately, Congress to make this expansion a reality.