Securities and Exchange Commission Historical Society

The Center for Audit Quality Gallery on Corporate Governance

Problems of Performance

Crisis, Round 1

“While attorneys arguably have become too intimately involved in the business decisions of their public company clients, many Boards of Directors have maintained an unhealthy distance from the same. Boards – and particularly outside directors – were conceived of as the shareholders’ representative, yet too often, they are dominated by associates and friends of senior management. Moreover, board membership too frequently has been viewed by outsiders as an honor or a perk instead of a substantive job. Many outside directors have lacked expertise in the relevant industry, and in accounting and financial reporting issues. Thus, Boards were too rarely equipped to uncover and derail the determined efforts of management to cook a company’s books.”

November 1, 2002 Speech by Stephen Cutler, Director, SEC Division of Enforcement at the University of Michigan Law School

The 2001 collapse of Enron and the bankruptcy of WorldCom the next year demonstrated what could happen when management made financial reporting a shell game and directors either overlooked or ignored it. The events gave fresh urgency to earlier initiatives by lawyers, accountants and regulators to better ensure financial statement integrity.42

The result was a groundswell of support for the reform of corporate governance standards and passage of the Sarbanes-Oxley Act in 2002, which imposed federal standards for business conduct, although it left states responsible for direct oversight. Sarbanes-Oxley also sought to improve financial reporting by obliging companies to regularly rotate audit partners and limit the non-audit services that accounting firms could offer. It required that audit committee members be independent directors, with at least one able to interpret financial statements. The audit committee received the power to hire and fire auditors, traditionally a management prerogative. Sarbanes-Oxley finally directed corporate executives to certify their financial reports and required auditors to certify internal controls over financial statement reporting.

As state prerogatives were complemented by federal measures, industry efforts were stepped up. The New York Stock Exchange and NASDAQ revised their listing standards to require boards with a majority of outside directors, and audit, nominating, and compensation committees comprised entirely of independent directors.43

The accounting profession was hardest hit by the scandals. Arthur Andersen, auditor to both Enron and WorldCom, crumbled, turning the “Big Five” accounting firms into the “Big Four.” Sarbanes-Oxley established the Public Company Accounting Oversight Board to more effectively set and enforce standards governing audit firms. The profession itself worked to restore integrity to the audit, launching the non-profit Center for Audit Quality in 2007. With members, including large public company accounting firms, the organization sought to promulgate better practices and inform policy development. With corporate accountability scandals cutting a swath of devastation through the economy of the early 2000s, good corporate governance came in demand, as market participants increasingly integrated it into evaluations of corporate performance.44


Previous Next

Related Museum Resources

Papers

April 12, 2001
image pdf (Courtesy of the National Archives and Records Administration)
December 7, 2001
image pdf (Courtesy of the National Archives and Records Administration)
December 17, 2001
image pdf (Courtesy of the National Archives and Records Administration)
December 17, 2001
image pdf (Courtesy of the National Archives and Records Administration)
January 9, 2002
image pdf (Courtesy of the National Archives and Records Administration)
January 16, 2002
image pdf (Courtesy of the National Archives and Records Administration)
January 16, 2002
image pdf (Courtesy of the National Archives and Records Administration)
January 17, 2002
image pdf (Courtesy of the National Archives and Records Administration)
January 18, 2002
image pdf (Courtesy of the National Archives and Records Administration)
January 22, 2002
image pdf (Courtesy of Eugene H. Rotberg)
January 23, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 4, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 12, 2002
image pdf (Courtesy of the National Archives and Records Administration)
March 11, 2002
image pdf (Courtesy of the National Archives and Records Administration)
March 19, 2002
image pdf (Courtesy of the National Archives and Records Administration)
April 2, 2002
image pdf (Courtesy of the National Archives and Records Administration)
April 8, 2002
image pdf (Courtesy of the National Archives and Records Administration)
April 9, 2002
image pdf (Courtesy of the National Archives and Records Administration)
April 26, 2002
image pdf (Courtesy of the National Archives and Records Administration)
April 30, 2002
image pdf (Courtesy of the National Archives and Records Administration)
May 3, 2002
image pdf (Courtesy of the National Archives and Records Administration)
June 2002
image pdf (Courtesy of the National Archives and Records Administration)
June 3, 2002
image pdf (Courtesy of the National Archives and Records Administration)
June 26, 2002
image pdf (Courtesy of the National Archives and Records Administration)
June 26, 2002
image pdf (Courtesy of the National Archives and Records Administration)
June 27, 2002
image pdf (Courtesy of the National Archives and Records Administration)
July 2, 2002
image pdf (Courtesy of the National Archives and Records Administration)
July 5, 2002
image pdf (Courtesy of the National Archives and Records Administration)
July 11, 2002
image pdf (Courtesy of the National Archives and Records Administration)
July 15, 2002
image pdf (Courtesy of the National Archives and Records Administration)
July 17, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 1, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 2, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 5, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 5, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 15, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 16, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 27, 2002
image pdf (Courtesy of the National Archives and Records Administration)
August 30, 2002
image pdf (Courtesy of National Archives)
January 23, 2003
image pdf (Courtesy of National Archives)
January 28, 2003
image pdf (Courtesy of National Archives)
February 19, 2003
image pdf (Courtesy of National Archives)
April 9, 2003
image pdf (Courtesy of National Archives)
June 5, 2003
image pdf (Courtesy of National Archives)
May 14, 2004
image pdf (Courtesy of National Archives)

Oral Histories

14 April 2008

Daniel Goelzer

09 March 2012

Michael Oxley

Programs

15 November 2012

A Measured Response?

Moderator: Robert K.D. Colby

Presenter(s): Daniel Goelzer, Peggy Peterson, Dean Shahinian, Linda Chatman Thomsen

16 October 2012

Deloitte Fireside Chat VII: The Profession Looks at Sarbanes-Oxley

Moderator: Mark Peecher

Presenter(s): Alan Beller, Joseph Ucuzoglu

30 July 2012

The Sarbanes-Oxley Act: The First Decade

Moderator: Mark Beasley

Presenter(s): Michael Oxley, Paul Sarbanes

Made possible through the support of the Center for Audit Quality

22 March 2012

Diane Sanger Memorial Lecture

Presenter(s): Harvey Goldschmid

Made possible through the support of the family of Diane Sanger

16 October 2007

Fireside Chat - Sarbanes-Oxley Section 404

Moderator: Theresa Gabaldon

Presenter(s): Kurt Schacht, Herbert Wander

Galleries

Wrestling with Reform: Financial Scandals and the Legislation They Inspired
The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting

Permission for Use

The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.

Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.

Material used with the Society's permission should be credited to: www.sechistorical.org.