Of Newton, Heisenberg, and Sarbanes-Oxley--corporate accountability and the provision of tax services.

• Author: McCormally, Timothy J.
• Position: Foreword

Isaac Newton Meets Arthur Andersen, Enron, and WorldCom

An immutable law of physics--Newton's third law of motion--is that for each action there is an equal and opposite reaction. Technically speaking, Newton's third law means that in every interaction, there is a pair of forces acting on the two interacting objects. The size of the forces en the first object equals the size of the force on the second object. And the direction of the force on the first object is opposite to the direction of the force on the second object.

Newton's third law of motion has an analog in the realm of public policy, law, and politics. For proof, you need look no further than Congress's enactment earlier this year to the Sarbanes-Oxley Act of 2002, which was intended to enhance corporate responsibility (through new corporate governance and disclosure obligations), to increase auditor independence and establish greater oversight of the audit process for public companies, and to toughen the penalties for securities law fraud and other violations. Sarbanes-Oxley was the "equal and opposite reaction" to an alphabet soup of corporate and accounting scandals, from Adelphia to Xerox, with Arthur Andersen, Enron, and most particularly WorldCom providing the main impetus. The titillating nature of some of the scandals--whether involving allegations of insider trading by Martha Stewart or $6,000 shower curtains for Tyco International CEO Dennis Kozlowski--fanned the flames and provided a nexus between the arcana of generally accepted accounting principles, the white-hot rhetoric of Washington, and the public at large. And in the end, Congress rushed to overwhelmingly pass and President Bush signed legislation whose precise effects remain unknown but whose purpose was, the public was told, to fundamentally change the nature of corporate governance.

Overview of Sarbanes-Oxley

The Sarbanes-Oxley Act represents the most important legislation affecting corporate governance and the accounting profession in 70 years. The Act prohibits personal loans to executive officers and directors. It requires CEOs and CFOs to certify each annual and quarterly report filed with the Securities and Exchange Commission and imposes criminal penalties for false certifications. It accelerates the reporting requirements in respect of changes in equity ownership, and generally increases the level and timeliness of financial disclosures. And it significantly increases the penalties for security law...