April 3, 2006
Sarbanes-Oxley: Bitter Pill But Good Medicine, Says Prentice
By Amy Lavergne

In his lecture for the Faculty Research Presentation Speaker Series, “Sarbanes-Oxley Unfolding,” Robert Prentice outlined the Sarbanes-Oxley Act of 2002, commonly known as SOA. The act covers issues such as accounting reform, corporate responsibility, disclosure, governance, new crimes and punishments.

Prentice, information, risk, and operations management professor at the McCombs School, said that while there is a consensus regarding the regulation of accounting and corporate responsibility, the decision is not simply a government movement. He said that corporate newsmakers such as Enron and WorldCom were to blame.

“We owe it to the greedy, crooked guys who ought to go to jail,” he said.

As a result, SOA was established to give gatekeepers more incentive to be ethical, provide more accountability for companies, and to punish more in hopes of reducing the number of financial crimes. Prentice outlined each of the major sections of the act one by one. For each section, there was a problem, a solution and an outlook.

For example, section 303 of SOA addresses the problem of CEOs and CFOs “bullying auditors.” The solution was to make it a crime to coerce, manipulate or mislead an auditor. According to Prentice, the outlook for honest auditors is more leverage with companies.

Prentice said that section 404 was “the big one.” The problem of terrible financial reporting and plausible deniability was met with regulations that make management responsible for internal controls, which could be audited.

“When a CEO says ‘I know nothing,’ we can respond with ‘but you were supposed to,’” Prentice said.

The consequences of this particular section of the act are both positive and negative, Prentice believes. Fraud and earnings management have declined and market liquidity has improved, indicating increased investor confidence. However, the regulation is expensive, and it is unclear if benefits will outweigh the negative effects.

“I don’t think we’ll ever know for sure,” Prentice said.

SOA can never hope to close all the loopholes or solve all the problems, but despite the added reporting requirements, it does a fairly good job of solving the main problems, Prentice said.

“Overall, it’s going to be good for capital markets in America,” he said, “but boy, is it a pain.”