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July 30 marks the five-year anniversary of the Sarbanes-Oxley Act of 2002. The act sought to restore investor confidence after financial scandals had deeply soiled the reputations of both American corporations and their executives. Ample time has passed for Congress to assess whether Sarbanes-Oxley is working. Investor anxiety has calmed. Chief executive officers who thought they were above the law have been prosecuted. Auditors and in-house attorneys now appreciate that their professional obligations expose them to sanctions under the new federal law. But did Congress and the U.S. Securities and Exchange Commission (SEC) go far enough to ensure greater fidelity in corporate America? Conspicuously missing from the new team of corporate insiders recruited for federal enforcement of securities laws are members of the boards of directors � the backbone of corporate governance. Without question, Sarbanes-Oxley marked a watershed moment in corporate governance. It was well-intentioned legislation at a much-needed time. Yet differing views exist on whether it is working in its current form. Supporters cite the impressive rise of U.S. stock markets since the passage of the act as a sign of its success. And no one doubts that the threat of criminal penalties under Sarbanes-Oxley has inspired auditors to force an ever-growing list of corporations to issue restatements of their financial earnings. In 2005, 1,295 companies listed on U.S. securities markets issued restatements, almost twice the number that felt compelled to restate their books the prior year. Some see the number of restatements as proof that Sarbanes-Oxley is working. More skeptical observers conclude that the extraordinary number of restatements suggest that accounting shenanigans continue in corporate America. These critics are not comforted by the fact that nine general counsel of Fortune 500 companies resigned, “retired” or were fired in 2006 as a result of corporate misconduct. Observers on both sides would agree that Sarbanes-Oxley has profoundly changed the corporate culture in America. There is no tolerance for auditors and corporate attorneys turning a blind eye to securities fraud. And with the possibility of a felony indictment looming in the background, senior executives of public companies must be on their best behavior when vouching for the correctness of their company’s financial statements. Focus on the board’s obligations Progress has been made. But the SEC needs to refine the enforcement of the act and directly address the obligations of the board of directors, who have so far escaped detailed scrutiny. Directors are entrusted with important responsibilities as stewards of the shareholders of the companies they serve. Their duties must be approached with a seriousness commensurate with those obligations. Historically, if a board decision results from conscientious deliberation, even if ultimately proven to be off the mark, board members are not subject to liability. The long-standing business judgment rule affords directors broad latitude in making decisions affecting corporate matters. But imposing more rigid standards on a board to uncover corporate misbehavior should further the objectives of Sarbanes-Oxley. The scandals of the Enron era highlighted a number of boards of directors either unwilling or unable to demand corporate integrity. Some observers pointed to the intense social pressure of the often close relationships among the company’s directors, the CEO and chief financial officer, the in-house attorneys and even the independent auditors as dampening their will to halt a violation of the law. Sarbanes-Oxley’s demand of greater independence for those appointed to the board of directors was an excellent first step toward neutralizing the “country club effect” among America’s corporate elite. For the positive momentum to continue, boards need to implement measures that demand that managers demonstrate the soundness of their decision-making and of their efforts to prevent corporate fraud. Surprisingly, boards have been slow or reluctant to establish qualified legal-compliance committees and other SEC-recommended reforms intended to promote a detached and neutral assessment of corporate integrity. Greater SEC enforcement of Sarbanes-Oxley that extends more personal liability to directors may be the best motivator in satisfying this objective. Vahe Tazian is associate general counsel for Plastech Engineered Products Inc., a Dearborn, Mich.-based automotive supplier. William H. Volz is professor of business law and ethics at Wayne State University in Detroit. Their article, “The Role of Attorneys under Sarbanes-Oxley: The Qualified Legal Compliance Committee as Facilitator of Corporate Integrity,” was published recently in The American Business Law Journal.

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