Sarbanes-Oxley: are audit committees up to the task?

Abstract

The Sarbanes-Oxley Act (2002) (hereafter, SOX or the Act) brought forth sweeping changes in corporate governance practices in the US. The Act stipulates more stringent internal control requirements, demands more timely and extensive corporate disclosures and requires executive certification of financial statements. The internal control and executive certification requirements have met with considerable scrutiny in the press and in the academic literature. The Act also redefines the role of the audit committee (AC). In addition to requiring only independent members as well as a financial expert on the AC, the Act requires the AC to take full and direct responsibility for hiring, firing, and compensating external auditors. These AC provisions, and, in particular, those relating to the interaction between the AC and auditors have received little scrutiny.