Taboo tradeoffs: Sarbanes-Oxley and the ethics of auditing
Massive audit failures in the early days of the 21st century led to the passage of one of the most sweeping reforms of public reporting and auditing since the Securities and Exchange Acts were passed in the early days of the New Deal—the Sarbanes-Oxley Act (SOX). Passed as emergency legislation focused on slowing the free-falling stock market on the heels of the collapse of Enron and other corporate giants, SOX was enacted to restore confidence in the truthfulness of published financial information, the trustworthiness of the audit process, and the integrity of corporate management.
The purpose of this paper is to examine the impact of SOX legislation on the corporate reporting practices of corporations and how potential changes reflect on the ethics of auditing. Specifically, the research project examines three key elements of corporate reporting: the form of reports provided by corporations (10-K, traditional free-standing financial statements, or hybrids) and any changes in these reports since 2002, the informativeness of the published financial statement, and the trend in audit fees over the five- year period since the passage of SOX. The results suggest that SOX has in reality resulted in the ethical dilemma called a “Taboo Tradeoff”—companies appear to be substituting 10-Ks, which are technical and difficult for the average investor to read for traditional reports as a means to offset escalating audit fees. The auditors, who were at the root of the problem, benefit, resulting in what one respondent to the study has defined as “the greatest transfer of societal wealth to a profession” in the history of the United States.