In defense of Sarbox: despite "noise" from some CEOs, Deloitte's James Quigley says Sarbanes-Oxley is working well

Chief Executive, The, May, 2005

James Quigley, chief executive of Deloitte & Touche, argues that the Sarbanes-Oxley Act of 2002 should not be diluted or amended, but its implementation could be clarified. He made his remarks in an interview with Editor-in-Chief William J. Holstein as part of the CEO lecture series at New York University's Stern School of Business. Here are excerpts:

Did the scandals of recent years represent a systematic failure by CEOs as a whole, or were they the actions of just a few bad apples?

It's a classic debate. There are many executives who, I think, rightfully, and even strongly, hold the view that this wasn't a failed or flawed system. There were a few bad apples.

What I believe happened to us, however, was that the sustained expansion of the 1990s caused management, boards and perhaps, even to some degree, auditors to become a little bit complacent about their essential roles in our capital markets process. When World-Com occurred, the public outcry was so strong that we needed to have a very, very dramatic change. Our public policysetters concluded that it wasn't just a question of a few bad apples, but that the barrel we were storing these apples in was flawed. There were some fundamental flaws in that corporate governance model. Thus, we were given Sarbanes-Oxley, the most sweeping changes in our securities laws in 75 years.

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When you look at that whole complex mosaic of changes that have been made--much more aggressive audit committees, audit committees standing between management and the auditor, and the auditor accepting this new client called the audit committee--I believe strongly that the risk of fraud in financial reporting has been reduced as a result of this new model, this better apple barrel.

How much have your fees increased, and how much more time are CEOs spending on these issues?

Audit fees have moved up by anywhere from 50 percent to more than 100 percent. Management is spending more time on these activities than it has heretofore. I believe we will get to the point where we will no longer see CEOs testifying that they have no idea what's included in their financial statements or what the systems are that produced them and that they have no responsibility for them. I believe that's what our public policymakers wanted to take away, that defense of "not my responsibility."

Were criminal penalties necessary?

If the forfeiture of any compensation that you might have received in the prior five years were to apply to you, at Chief Executive magazine, you'd spend more time on that (compliance) activity. I think what has happened is healthy. Companies have now put in place disclosure committees to consider items for inclusion in their periodic securities filings, their 10Qs and their 10Ks.

When I sit in the audit committee room and I watch a CEO, he asks the leader of the disclosure committee to provide their report. That CEO has consulted with that disclosure committee as that report is coming forward. I believe the efficacy, the transparency and the completeness of those financial disclosures have been enhanced as a result of this. The amount of time that executive is spending is significant. They really are, sleeves rolled up, much more involved. That's healthy.

Is there any hint that there's going to be any relaxation of the Section 404? We've seen that the SEC has given more time to smaller companies to comply with it and has exempted some European companies. Do you think it would be appropriate for this section of law to be improved or relaxed in any way?

What I said when I testified before Mike Oxley's committee was that we need to find our way through a full cycle of implementation. Then we need to push back and ask ourselves, "Can we be more efficient in actually accomplishing the objectives of the law than how it played out in that first year." I think there will be ways that we can definitely improve the effectiveness.

CEOs don't seem to be in control of the numbers they report any more.

One of the changes that has occurred is the balance has shifted in the financial reporting process--you've inserted the audit committee between financial management and the auditor. Any time you make a change that significant, there will always be resistance. I think that's where some of the noise is coming from right now.

So you seem to be willing to accept the idea that implementation of this law has not been perfect.

I think any time you reach an inflection point in business, it's very challenging. In 2001, our public policymakers decided they wanted us to move to a new state. They wanted audit committees much more involved and much more aggressively performing their role. They wanted auditors to have a new regulator. They wanted us to perform a new report. And the degree of change that they wanted to layer into the system to try to improve its effectiveness is very, very significant. Any time a system goes through change of that magnitude, there's going to be resistance to the change.

I believe there are many investor groups that do not want to see a gigantic step back from what Sarbanes-Oxley is working to try to put in place. I don't think there's an appetite in the marketplace today for significant backsliding.