黑料视频

In the wake of the Enron and other corporate scandals, new research from 黑料视频 suggests that strengthening parts of the 2002 Sarbanes-Oxley (SOX) Act would improve corporate performance and shareholder value.

It鈥檚 particularly relevant as Republican presidential candidates have called for repealing some or all of SOX鈥檚 provisions and even President Obama has mentioned easing its restrictions. Meanwhile, the Public Company Accounting Oversight Board, established to oversee compliance with the law, is considering ways to improve transparency requirements. Yan Zhang, an associate professor of accounting at 黑料视频, has found:

鈥� Companies with greater accounting transparency have greater cash value and less wasted spending.

鈥� The independent and expert audit committees required by Sarbanes-Oxley 鈥� or SOX 鈥� are only as effective as the firm鈥檚 chief executive is weak: The stronger the CEO, the less effective the audit committee.

鈥� Measures meant to improve financial reporting quality have unintended costs.

鈥淪OX is good, but it doesn鈥檛 solve the problem entirely,鈥� Zhang says.

Before the passage of Sarbanes-Oxley, big accounting firms such as Arthur Anderson (Enron鈥檚 auditor) lacked independence. A key provision of SOX is removing conflicts of interest for these firms. In fact, it鈥檚 now unlawful for auditors to perform various non-audit services for their audit clients. The Public Company Accounting Oversight Board has been seeking public comment on how to further improve the independence of the outside auditing firms retained to examine companies. Inspectors are able to trace an audit failure to a competence issue, such as in the design of the audit methodology or in its execution. But on the whole, these firms are highly competent. And yet the failures continue to occur, in spite of firms鈥� remediation efforts. The challenge as the oversight board is to question whether the root of the problem is auditor skepticism. And the loss of independence destroys skepticism. Zhang鈥檚 research suggests that the board should consider limits to the influence a chief executive can have on the audit committee, in addition to the outside audit firms.

In the post-SOX era, stock exchanges prohibit CEOs from being directly involved with selecting members of the audit committee, but that doesn鈥檛 guarantee the committee will be free of a CEO鈥檚 informal influence. Zhang and her colleagues set up a metric to gauge how powerful a chief executive is, measuring prestige, expertise, corporate ownership and structural power.

The data showed that CEO power weakens the effectiveness of audit committee financial expertise in reducing earnings restatements 鈥� an indication that a supposedly independent and expert audit committee could still be influenced, even if informally, by a chief executive. A chief executive could refuse to provide necessary information or obfuscate details the audit committee requires. And a strong CEO can get away with it.

鈥淭he purely independent nominating committee doesn鈥檛 solve the problem,鈥� Zhang says. 鈥淚t merely mitigates the problem.鈥�

Says oversight board spokesman Brian Goodnough: 鈥淎nything pertaining to CEO and CFO power over the company is an area we鈥檝e particularly gotten into.鈥�

Zhang鈥檚 study didn鈥檛 consider the potential effects of limiting audit firm tenure, but her first suggestion in countering the effect of a powerful CEO is more direct: Re-balance the power other directors have to counter the chief executive, regulation that would require action by the Securities and Exchange Commission.

James Doty and other members of the oversight board are concerned about transparency, but were under pressure in late 2011 to ease disclosure regulations, even though Securities and Exchange Commission Chairwoman Mary Schapiro has called for increased transparency in the capital markets to protect investors. Zhang鈥檚 research suggests they should stay the course, or even force increased transparency.

Zhang and a colleague examined the cash on hand of a number of companies, and found that opaque (less transparent) companies had a perceived discount for their cash levels: Investors valued cash on hand as low as 45 cents per $1. Transparent firms saw that value around $1.05 per $1.

鈥淭aken together, our findings suggest that managers in firms with fewer disclosure activities are less subject to scrutiny of capital markets and thus are more likely to expropriate cash assets,鈥� they write. And that can lead to empire building.

The logic is this: A CEO is looking to expand the company, because a larger company brings greater compensation. With little transparency and a large amount of excess cash, a CEO may be tempted to squander cash on weak acquisitions. 鈥淎 lot of firms are sitting on too much cash right now,鈥� Zhang says.

鈥淭he empire-building motive is particularly severe when managers control cash levels in excess of those needed for operations and investment,鈥� she writes. 鈥淟ending further credence to the monitoring effect of disclosure activity, we find evidence that the negative effect of major expansion on shareholder value is reversed when the firm has sufficient disclosure activities.鈥�

One section of Sarbanes-Oxley requires audit committees to include financial experts. Originally, SOX 407 narrowly defined a financial expert as an accountant. Later the SEC broadened this definition by allowing others with financial expertise, such as a chief executive, investment banker or venture capitalist, to serve in this capacity as well as accountants.

Zhang鈥檚 research shows that the current broad definition comes at a price. She first found that audit committee financial experts outperform non-financial experts on audit committees in their trades of a firm鈥檚 stocks. She further divided audit committee members into two groups, accountants and non-accountant financial experts, and found that these 鈥渆xpertise rents鈥� are driven by the non-accounting financial experts. Accountants, she says, made fewer trades and gained less value than the non-accountants, and the non-accountants were more likely to have abnormal returns.

That suggests one of the following options:

鈥� Accountants and CPAs, governed by professional ethics that require them to place their fiduciary duty ahead of their own gain, forgo opportunities to earn expertise rents.

鈥� Non-accountant committee members 鈥� venture capitalists, CEOs and others 鈥� may be more experienced in investing in the capital market and thus trade more aggressively than accounting financial experts.

鈥� The non-accountant financial experts may be more likely to engage in inappropriate insider trading. (Zhang鈥檚 research has not delved into this possibility.)

鈥淭his is the first study, to our knowledge, that demonstrates a negative aspect of mandating a financial expert on the audit committee,鈥� Zhang says.

Her solution? Require all financial experts on the audit committee to be accountants, supporting the law鈥檚 original approach.

鈥淥verall,鈥� she says, 鈥渙ur findings suggest that by restricting financial expertise on the audit committee to accounting financial experts, expertise rents earned by audit committee financial experts will be significantly reduced.鈥�

With SOX up for debate, Zhang鈥檚 work suggests ways that additional reforms can rebuild investors鈥� faith in the market. Her findings are forthcoming in top-tier publications, including the Accounting Review.

鈥淚s the reform good enough? Is it working?鈥� she asks. 鈥淲e do see financial improvements and an improvement in earnings quality, but regulators need to do more.鈥�