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(Reuters) - When Peregrine Financial collapsed earlier this month, a nagging question resurfaced. As in the implosion of Lehman Brothers, the fall of Bernard Madoff and other cases in recent years, many asked: Where were the accountants?
That this question still arises could be seen as an indictment of the 2002 Sarbanes-Oxley law, enacted 10 years ago on Monday. The law was a response to accountants' failures to sound the alarm about financial misconduct at Enron Corp, WorldCom and a host of other companies.
But, lawyers and analysts say that for the most part Sarbanes-Oxley is working. It has strengthened auditing, made the accounting industry a better steward of financial standards, and fended off Enron-sized book-cooking disasters.
Yes, it has fallen short in important ways, but these failures are on a more subtle level, the experts say.
The law, signed by President George Bush on July 30, 2002, created a new auditor watchdog, the Public Company Accounting Oversight Board (PCAOB). The law strengthened internal controls over companies' accounts and set stiff criminal penalties for executives who cook the books. One of its toughest provisions required corporate executives to certify the accuracy of financial statements and imposed jail terms of up to 20 years for willful violations.
While only a handful of people have faced criminal charges over false statement certification, the Securities and Exchange Commission has invoked that part of Sarbanes-Oxley to bring more than 200 civil cases.
One reason for the small number of criminal cases is that corporations have taken steps to insulate C-suite officers from culpability. Another reason is that prosecutors often choose to pursue tried-and-tested charges such as fraud when seeking to bring corporate wrongdoers to justice.
Sarbanes-Oxley also increased criminal penalties for various kinds of financial fraud. Maximum prison terms for mail fraud, for example, jumped to 20 years from five years.
These changes had a sharp deterrent effect and have helped create a mindset that "accounting shenanigans aren't going to be tolerated anymore," said Peter Henning, a law professor at Wayne State University. "You're getting much longer sentences now than you ever saw before."
Trends in companies restating their financial reports also show the law's impact. Initially, restatements rose as executives scrambled to correct past reports, peaking at 1,790 in 2006, according to research firm Audit Analytics. But after that house-cleaning period, restatements dropped sharply, leveling off at around 790 for the past two years.
In the case of Peregrine Financial, asking where the accountants were seems at first glance to be a glaringly obvious question. But a closer look reveals a more complicated situation.
In the years before the futures brokerage collapsed, Peregrine used a little-known accounting firm, Veraja-Snelling Co, which reviewed its books and vouched annually for their validity.
Veraja-Snelling, a tiny firm run out of a home in suburban Chicago, was not subject to audit inspections before 2010, when Wall Street reforms known as Dodd-Frank extended the PCAOB's authority to the auditors of broker-dealers -- too late for Peregrine.
Even if the PCAOB had that authority earlier, it is not clear that it would have made a difference. Peregrine bilked $100 million from its customers over nearly 20 years partly by forging bank statements, and there are no signs that Veraja-Snelling did anything wrong.
Peregrine and Veraja-Snelling declined to comment.
PricewaterhouseCoopers, the auditing powerhouse, did take a peek at Peregrine's books in 2000, Commodity Futures Trading Commission Chairman Gary Gensler revealed last week. But PwC has said it was never Peregrine's auditor. Rather, it said it was hired on a limited basis to carry out procedures laid out in a settlement between Peregrine and its regulators.
In some ways, Sarbanes-Oxley has not done enough to change the accounting and audit industry, critics say. It did not resolve an inherent tension within the industry's "client pays" business model -- that is, an auditor's basic conflict between serving the paying client and serving the greater good.
Nor has it brought increased competition to an industry that still is an oligopoly, now dominated by the so-called Big Four firms: Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte. Former Enron auditor Arthur Andersen is history.
Auditors have become more independent of clients, but not entirely so. The law limited the types of consulting that accounting firms can do for their audit clients, but left them free to do lucrative tax work. It made lead audit partners rotate off accounts after five years, but let audit firms serve the same clients indefinitely.
Supporters of Sarbanes-Oxley note that it was not designed to ensure that corporate accountants should be everywhere and know everything. And they say it is unfair to expect accountants to be front-line corporate cops, standing with government regulators in the fight against fraud.
Michael Oxley, former chairman of the House of Representatives Financial Services Committee, said the law he co-authored has stood the test of time.
"We've not had anything even approaching an Enron or a WorldCom or any of the other accounting scandals that we witnessed 11 years or so ago," he said in an interview.
Blaming the law for some of the recent scandals is based on a misconception about what it was supposed to do, said Oxley, a Republican. "It really had nothing to do with Lehman Brothers, AIG and the other meltdowns in 2008. It didn't really have anything to do with Bernie Madoff," he said.
Former Democratic Senator Paul Sarbanes, who is scheduled to speak on Monday night with Oxley at an event marking the law's 10th anniversary, has also been upbeat in recent remarks about the law.
Approved over the resistance of much of the business community, Sarbanes-Oxley was under attack even before it took effect. Its requirement that companies pay for audits of their internal controls came in for particularly sharp criticism because of soaring costs and the provision was eventually scaled back.
Another weakening of the law was included in the Jumpstart Our Business Startups, or JOBS, Act, signed into law by President Barack Obama in April. Meant to aid small companies in raising capital and going public, the act lets small, start-up businesses ignore Sarbanes-Oxley's checks on internal controls for a few years. Obama has told the Justice Department and the SEC to keep an eye out to protect investors, but some are concerned the act opens the way for misconduct.
Another challenge to Sarbanes-Oxley is still to come. Concerned about the performance of auditors in the credit crisis, the PCAOB is considering an array of tough reforms and encountering fierce opposition from business lobbyists.
Congressional opponents of Sarbanes-Oxley have additionally tried sometimes to limit its scope by holding back the budgets and staffing of regulatory agencies like the SEC.
Lynn Turner, a former chief accountant at the SEC, one of the agencies that enforces Sarbanes-Oxley, said: "It's like any legislation. It only works if you've got a regulator and a cop enforcing it."
Reporting by Kevin Drawbaugh in Washington and Dena Aubin in New York; Additional reporting by Sarah Lynch in Washington; Editing by Eddie Evans and Maureen Bavdek