Early Evidence of How Sarbanes‐Oxley Implementation Affects Individuals and Their Workplace Relationships

• Date: 01 February 2005
• Author: DAVID L. SCHWARZKOPF,HUGH M. MILLER
• DOI: http://doi.org/10.1111/j.0045-3609.2005.00002.x
• Published date: 01 February 2005

Business and Society Review

110:1

21– 45

© 2005 Center for Business Ethics at Bentley College. Published by Blackwell Publishing,

350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Blackwell Publishing, Ltd.Oxford, UKBASRBusiness and Society Review0045-3609© 2004 Center for Business Ethics at Bentley College1101Original ArticleBUSINESS and SOCIETY REVIEWSCHWARZKOPF AND MILLER

Early Evidence of How

Sarbanes-Oxley

Implementation Affects

Individuals and Their

Workplace Relationships

DAVID L. SCHWARZKOPF

AND

HUGH M. MILLER

W

ritten at a time of heightened awareness of the role that

corporate financial reporting plays in society, the Sarbanes-

Oxley Act of 2002 (the Act) drew immediate attention thanks

to its wide range of reforms. Although public companies must com-

ply with the Act’s provisions as a matter of federal law, the question

of whether the Act accomplishes the legislators’ goal of restoring

consumer confidence in financial markets has yet to be settled. As

with most legislation, the effect of the Act will be largely determined

by its implementation, as companies and their advisors—auditors,

accountants assisting with implementation tasks, lawyers, and

analysts—struggle with the details that Congress left to the Securities

and Exchange Commission (SEC) and other interpretive bodies.

The improvements sought by Congress depend in part on the extent

to which individuals at organizations affected by the Act better

understand company processes and help the company and its

David L. Schwarzkopf is an assistant professor of accountancy at Bentley College. Hugh M.

Miller is a graduate of Bentley’s MBA program and a candidate for a Masters in Global

Financial Analysis at the college.

The authors thank Mary Chiasson, Donna Fletcher, W. Michael Hoffman, Elliott Levy,

Catherine Usoff, anonymous reviewers, and the staff of the Center for Business Ethics at

Bentley College for their comments and encouragement, and the Babson-United, Inc.,

Fund for Research in Ethical Financial Reporting for its financial support. The authors are

particularly grateful for the time and cooperation of the participants in this research.

22 BUSINESS AND SOCIETY REVIEW

business advisors to form effective working relationships. We report

on how efforts to comply with the Act are affecting this understanding

and these relationships, based on our interviews with and surveys

of company representatives, accountants, and others involved in

implementation.

Our investigation aims to accomplish three broad objectives:

•To highlight forces at work during the Act’s implementation

that are neither evident from a cursory glance at company

activity nor widely discussed in the media.

•To better see potential short-term favorable and unfavorable

outcomes that may result from the Act.

•To help identify potential long-term trends that may hold

implications for public policy or opportunities for research.

Our hope is that a view from “midstream” of the Act’s implemen-

tation can inform discussion on the legislation’s merits, while pre-

paring the community for possible outcomes. Additionally, as the

Act’s effect on policy and practice becomes clearer, the path of its

influence can be better traced with an appreciation of what was

happening during these early stages of compliance efforts. Thus,

although we cannot predict any results, we can offer a closer look at

changes under way.

We focus on efforts to implement Section 404 of the Act, which

requires corporate management to assess the effectiveness of the

company’s internal controls and mandates that auditors report on this

assessment. As described in the following discussions, this section

has brought about a surge in activity involving many levels of

company management and staff as well as a number of service

providers. As such, it is a bellwether for changes in significant

relationships within and among those groups.

Because the Act has the potential to affect wide segments of the

public, it is important for the broader business and policy commu-

nities to view activity during implementation. Hence, although our

investigation was motivated by considering how the Act can affect

an auditor’s understanding of the company under audit, we do not

focus on the specifics of accounting, auditing, or the legislation.

Our concern is with individual and social changes emerging during

implementation. This emphasis precludes any statement on the

substance of Section 404 or other parts of the Act. As we argue