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


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Related Museum Resources

Papers

April 12, 2001
image pdf (Courtesy of the National Archives and Records Administration)
December 7, 2001
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December 17, 2001
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December 17, 2001
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January 9, 2002
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January 16, 2002
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January 16, 2002
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January 17, 2002
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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
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February 1, 2002
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February 1, 2002
image pdf (Courtesy of the National Archives and Records Administration)
February 1, 2002
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February 4, 2002
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February 12, 2002
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March 11, 2002
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March 19, 2002
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April 2, 2002
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April 8, 2002
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April 9, 2002
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April 26, 2002
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April 30, 2002
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May 3, 2002
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June 2002
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June 3, 2002
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June 26, 2002
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June 26, 2002
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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
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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
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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
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February 19, 2003
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April 9, 2003
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June 5, 2003
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May 14, 2004
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Oral Histories

14 April 2008

Daniel Goelzer

Video: 10:10

Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.

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

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