The progress that Sarbanes Oxley Act seeks to make in corporate governance is best understood by drawing an analogy with the total quality movement. In the days of statistical quality control, companies looked at quality after the fact and measured defect rates in a sample of their final output. This was not helpful since companies could not undo the damage, i.e., they had no way to recover the costs incurred on the rejections. The Japanese brought about a paradigm shift by implementing systems to produce quality products at the outset. They placed built-in checks on the production floor where errors in manufacturing were corrected before they were compounded as work-in-progress moved from one stage to another.
Similarly, the message of Sarbanes Oxley compliance is that management should change from a reactive approach to risky events to a proactive method which anticipates adverse situations, takes preemptive action before an unfavorable course of events snowballs into a crisis or the systems and processes are strong enough to weather the buffeting should unforeseen events strike.
SOX Compliance has removed the veil that hid many ills inside corporations. It now seeks real time information that can materially impact the financial performance of a corporation. Senior management cannot hide behind the familiar ruse that their task is to provide a strategic direction to their companies; they are now required to monitor performance metrics, in real time, to ensure that their companies are not overtaken by unexpected events. SOX Compliance has dramatically raised the standards of transparency, and accountability in companies to ensure that they can sustain a consistent level of performance. The key instrument to clean corporations of fraud and inefficiency is to provide detailed information, delivered electronically, to executives, shareholders and regulatory bodies. Strategic and tactical metrics to measure the health of corporations will play a critical role in the governance of corporations in the future.
SOX Compliance also frees the Board of Directors and the Auditors from the cult of the Chief Executive and provides them space to play their roles.Increasingly; they will bring their knowledge and creativity to manage the risks of companies.
Compliance would require data warehouses for storage of financial and non-financial data affecting risks and its analysis for continually reviewing strategies for risk management. In this framework, company executives and board members will not have any room to point fingers at someone else since they would have access to all corporate information and the responsibility to monitor it.
In the past, companies had a knee-jerk reaction to unexpected turn of events and usually were not the masters of their situation. Typically, companies could only patch up their balance sheets when their financial performance fell short. Nothing in the extant corporate governance legislation required them to analyze the root causes of lapses in performance and work towards improving the outcomes over time. Sarbanes Oxley requires companies to take a strategic view of risk and learn from their experiences to improve their model for coping with risk.
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