Corporate Governance in the U.S

After the collapsed of ENRON, the U.S government decided that enough is enough. Corporate governance based on recommendation i.e for corporate players to comply or if the situation in their companies being that its difficult to comply; then explained; is insufficient to curb corporate governance problems. As such, the Sarbanes-Oxley Act (2002)of the US was a serious wakeup call. It has been much debated and there are very mild protests in some quarters. Nevertheless, it is a call to get back to fundamentals and it identifies 58 separate provisions that affect internal auditing and the question of Directors of Boards looking the other way is unacceptable and must change. This message is applicable to the public and private companies alike. Some of the vital extracts from the BIS review 2003 on SOX (2002).

• Boards of directors should uphold their responsibility for ensuring the effectiveness of the company’s overall governance process.

• Audit Committee should observe their responsibility for ensuring that the company’s internal and external audit processes are rigorous and effective.

• CEOs and senior management should strengthened their responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards.
This requires meaningful certifications, codes of ethics, and conduct of insiders that, if violated, will result in fines and criminal penalties, including imprisonment.

• External Auditors should focus only in their audit work.

• Internal auditors should uniquely be positioned within the company to ensure that its corporate governance, financial reporting and disclosure controls, and risk management practices are functioning effectively. Although internal auditors are not specifically mentioned in the Sarbanes-Oxley Act, they have within their purview of internal control the responsibility to examine and evaluate all of an entity’s systems, processes, operations, functions and activities.

However, a specific section of Sarbanes-Oxley Act requires senior management to assess and report on the effectiveness of disclosure controls and procedures as well as on internal controls for financial reporting. All of these have to be in the public disclosure domain of the reports but outside the financial statements.

Further an internal auditor must have the highest ethics and be willing to sacrifice everything (consultation assignments) to maintain their independence within the auditing company. If there are different sections of companies, which offer turn-key management consultation, at least those who are involved in the audit exercise should disassociate themselves from being a part of consulting side of the company’s work. Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company, as there are threats of fines and imprisonment, the internal auditor’s voice is heard loud and clear by the Board.

As such, the introduction and implementation of Sarbanes-Oxley Act (2002) in U.S is really a divergence of corporate governance as usually practiced in many other countries around the world such as U.K and South East Asia. Just wondering how long this divergence could sustain or whether someday in the future, there would be sort of convergence in corporate governance practices.