Possible Changes to SOX
Although SOX has improved firms’ financial reporting, additional modifications could make SOX more effective. Adjustments could be made that will encourage better composition and performance of corporate boards, improve safeguards for whistleblowers, and enhance management accountability as well as the function of the PCAOB.
Although SOX put in significant provisions to improve corporate governance, which included the establishment of audit committees that had independent directors, there is room for improvement. One potential measure is to set term limits for directors, which would ensure that fresh eyes are reviewing business practices . Another measure is to limit the number of public company boards an individual could serve on, which would ensure that board members are not focusing on too many different companies. It is possible that these recommendations will constitute regulatory overreach. At minimum there could be measures that require continuing education for board members so that they remain current in their knowledge of best corporate practices.
Another weakness of the bill is that it does not provide protection for auditors who want to report fraud but worry about potential retaliation. Legislation could be created, requiring that no auditors can be fired unless a super majority of the shareholders approves it or the SEC allows it (Livingstone, 2003). In addition, the law already requires that a confidential reporting system is available to employees. Expanding that requirement to include suppliers, customers, and other entities could increase the likelihood that fraud is reported.
Changes to the law could also make it more challenging for internal controls to be over-ridden. For example, the law could require that managers must make changes that the auditors request. There could also be added regulations that encourage companies to increase the amount of checkpoints in financial reporting systems, which would ultimately minimize the temptation for employees to commit fraud. Finally, there are red flags that suggest the override of internal controls; certain employees, outside consultants, and board members should be mandated to attend a training which will help them look for such information. Examples of suspicious activity include changes in dollars or percentages between periods, or large, round figures that help enhance the company’s financial position – especially near the closing of an accounting period.
Finally, the PCABO has been effective in enforcing SOX but, like in any new organization, there can be changes made to improve the function of the board. The PCAOB should be re-authorized every set number of years. This would ensure an evaluation of the institution’s effectiveness and ensure it has maintained its independence from the community it is investigating. Additionally, a prompt appeal system should be implemented for auditors who are not happy about the decisions made against them. Currently, audit firms have a year to adjust their practices if the PCAOB finds them deficient. This amount of time should be shortened so the market and client firms can make adjustments more quickly.