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Thursday, December 16, 2004
Accounting crackdown costly to companies, poll says
The costs of complying with new accounting laws enacted in the wake of the Enron scandal are higher than companies have anticipated. But the process, executives say, should restore investor confidence in the market.
The conclusions come from auditing firm KPMG LLP through its annual survey of corporate executives in six regions of the country.
KPMG hired Penn, Schoen & Berland Associates Inc. to interview 98 local senior executives at public and private firms, 40 percent of whom represent the auto industry, between Nov. 17 and Dec. 7. The survey also found that local executives are not as optimistic about the overall economy compared with executives in other regions.
The 2002 Sarbanes-Oxley Act calls for public companies to fix holes in their accounting systems that allow for mistakes or fraud. The act also requires top executives to swear to the accuracy of financial reports.
A series of responses indicate that companies are concerned with the cost and time used to comply with the act:
•46 percent of respondents said Sarbanes and other legislation have had a negative effect on their businesses.
•28 percent said the regulations are "crimping entrepreneurial spirit, the ability to take risks and grow the business."
•31 percent said the costs of complying with Sarbanes-Oxley slightly outweighed the benefits. Another 31 percent said the costs greatly outweighed the benefits.
•47 percent said the legislation has boosted investor confidence somewhat.
The costs are expected to be high at first, said Arthur Levitt, former chairman of the Securities and Exchange Commission.
"If the cost of that brings back public confidence, in a cost-benefit analysis, it's well worth it," he said Tuesday in an interview.
The initial cost, he said, is dwarfed by the millions that shareholders lost due to corporate scandals.
Companies are hiring consultants and dedicating staff to test their accounting processes to ensure checks are in place to detect mistakes or fraud.
In local examples, Auburn Hills-based manufactured housing company Champion Enterprises Inc. estimated it has spent $2 million during the last two years to -- among other things -- hire 20 people across the country in consulting and full-time positions.
Port Huron-based Semco Energy Inc. is spending "a significant amount" to hire staff to review and document the company's procedures, said company spokesman Tim Lubbers.
"It's all about making sure the information is clean," said David Hardesty, a San Francisco-based accountant who has written four books about the act.
The first test of the new process will come next year when some large companies and their auditors will be required to release reports detailing whether their internal accounting systems are working.
With all of the internal changes comes a changing attitude in the boardroom, Levitt said.
Companies are giving auditors and audit committees -- composed of at least three board members -- more independence and clout.
In turn, corporate boards are moving from having a fraternal attitude to a skeptical attitude, he said.
"I think that's a hugely beneficial change," Levitt said.
In addition to accounting issues, KPMG measured the confidence local executives have in their companies and in the local economy.
KPMG found that 49 percent said their company's performance will be somewhat better next year.
The firm also found that 39 percent of respondents said their outlook for their local economies during the next year is somewhat better than this year. Another 39 percent say they expect it to be about the same. The numbers are tepid compared to the rest of the country, said Jeff Dobbs, managing director of KPMG's Detroit office.
"All of the challenges and opportunities certainly manifest in Detroit around the automotive industry," Dobbs said. "While there's plenty of good news, just the notion of the layoffs that we've had in Michigan temper probably everybody's point of view about how good next year is going to be."
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