Former U.S. Rep. Michael Oxley, one of the main architects of the Sarbanes-Oxley Act, recently retired from Congress after 13 terms. In March, the Ohio...

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CLEVELAND — Former U.S. Rep. Michael Oxley, one of the main architects of the Sarbanes-Oxley Act, recently retired from Congress after 13 terms.

In March, the Ohio Republican joined Baker Hostetler, where one focus of his legal work will be helping companies and investors understand the new corporate-compliance rules that Sarbanes-Oxley brought about.

He was in the law firm’s Cleveland headquarters recently and talked about the law.

Q: Has Sarbanes-Oxley resulted in greater confidence among investors?

A: I think that the market clearly reflects that. The Dow Jones industrial average was a little over 7,000 on the day the president signed the bill, and today it’s over 12,500. It’s the only objective way I can think of [to measure the bill’s impact].

Q: What about the complaints over costs to companies to do the internal controls analysis?

A: The cost is driven by not necessarily doing the internal controls but having it validated and certified by outside accountants. Basically you have a two-part system where the internal audit and the internal controls and all of that is subjected to oversight and re-evaluation by the outside auditor. And that, frankly, has driven most of the costs.

Q: Do you think there’s been incentive for accounting firms to find fault with minor things?

A: I think the incentive didn’t necessarily come internally from the bill. I think it came from outside with, first of all, accounting firms concerned there would be another Arthur Andersen or they would be sued unnecessarily. [The Andersen accounting firm was wiped out by lawsuits and a 2002 criminal conviction, later overturned by the U.S. Supreme Court, for its role in the Enron scandal.]

So they took a very, and I guess predictable, conservative viewpoint in terms of deciding what material weaknesses were and not really doing a good risk-based audit. One of the strengths of the changes the [Securities and Exchange Commission] is proposing is having a risk-based audit that should help to control some of the excess costs.

Q: How would the risk-based audit differ from what we have now?

A: Right now the auditing firms don’t make any distinction between a relatively minor material weakness and a weakness in internal controls that could cause the corporation to implode. What the SEC is trying to do is say, let’s take a rational look at this and determine what are the highest risks down to the lowest risks and address the highest risks first. Let’s not get down in the weeds to the point that you’re overwhelmed by the process and lose sight of what we’re trying to do here, which is to isolate and cure some of the major weaknesses.

Q: Would the proposed SEC changes apply to both small and large companies?

A: Yes, although they talk not only about a risk-based solution but also what they call a top-down, scalable plan, so it’s not a one-size-fits-all. Smaller companies would be treated differently than larger companies in the eyes of the SEC and the [Public Company Accounting Oversight Board]. That should also lower costs.

Q: How would the scalable plan work?

A: The expectations wouldn’t be as high with the smaller companies, with the understanding that a major meltdown in a company the size of Enron or WorldCom would have major consequences for the economy and the markets, whereas a much smaller company would not. It doesn’t create the same kind of risk to the bulk of investors or to the markets.

Q: How much protection does the legislation provide against the fraud we saw at Enron or WorldCom?

A: I think substantial. I think [the bill] was based on transparency and accountability, and I think to that extent we’ve gone a long way in making certain that it won’t happen. But there’s no certainty in this. Clever people can find ways around it.

Q: Is the total executive-compensation table now in proxies clear enough?

A: We’re just starting to see with the proxies that are coming out that it presents a much clearer picture of executive compensation, which was of course the goal of the SEC — to make that more understandable and readable. It’s up to the investing public to make determinations as to whether the compensation is fair, given the success or lack of success of the company.

Q: Do you see increased clarity on total compensation having any effect on the amount of compensation awarded?

A: My sense is there is a trend at major corporations toward equating performance with compensation. Major companies like Verizon and others have undertaken that, and I suspect that will be followed by a number of other corporations over the next several years.