Feb. 3, 2006
Culture Has Changed Since Sarbanes-Oxley, but Problems Remain
By Asher Garonzik

After the accounting scandal at Enron came to light in 2001, the federal government was compelled to conjure a definitive and firm response. When, the following year, Congress passed the Sarbanes-Oxley Act—the most drastic piece of legislation in recent years to affect corporate governance, financial disclosure and public accounting—the business world scrambled to comply with the new restrictions.

Michael Granof, professor of accounting at the McCombs School of Business and the Ernst & Young Distinguished Centennial Professor in Accounting, discussed just how much corporate culture has been transformed by Sarbanes-Oxley in his Executive MBA case study talk Jan. 27. According to Granof, “things have definitely changed, but many of the fundamental problems that we’ve had in the past still exist.”

The most significant difference now, Granof said, comes from new stipulations that place the full responsibility of the accuracy of a company’s earnings statement squarely on the shoulders of the company’s chief executive. Whereas before the passage of Sarbanes-Oxley CEOs like Enron’s Kenneth Lay could slough off blame onto their accounting department or claim ignorance to inconsistencies in spending, CEOs now must scrutinize the books themselves.

“These days, directors are taking their responsibilities seriously,” Granof said. “They know they’re subject to litigation if they don’t.”

The Sarbanes-Oxley Act also threatens severe legal action for accountants who fail to report shaky financial practices by their client companies. The result has been a shift in allegiance. “I think, before this, the auditors’ motivations were to please their client,” Granof said. “Now their responsibilities are to the investing public.”

But these adjustments in corporate culture haven’t changed the fundamental motivations of the people in charge. “Managers’ compensations are still performance-based,” Granof said. “They still want to increase their earnings.”

And while it’s much harder now for companies to doctor the books, they can still manage earnings by various means such as restructuring, acquisitions and discretionary transactions. This is where the line between ethics and values gets blurred. Still expected to meet analysts’ expectations, today “many executives insist on managing their earnings rather than managing their companies,” Granof said.

Because a corporation can make these sorts of alterations and stay within legal limits, the only prescription for these types of problems, Granof explained, is a change in corporate executives’ personal set of values. But how can such a drastic shift in beliefs be fostered? According to Granof, “questions like that aren’t susceptible to simple answers.”

Although Sarbanes-Oxley has certainly revolutionized the accounting profession in terms of culture and practice, Granof remains doubtful that the legislation will prevent future scandals in the vein of Enron.

“I think a lot has changed since 2001, but have fundamentals changed? Will it happen again?” Granof posited. “Probably.”