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Wednesday, December 15, 2004
Financial Executives Call SOX Compliance A Good Investment
New Oversight Systems survey found many benefits to Sarbanes-Oxley compliance, but they come with a high cost.
Compliance Pipeline
A majority of financial executives said SOX compliance was a good investment, according to the results of Oversight Systems Inc.'s 2004 Financial Executive Report On Sarbanes-Oxley Compliance, a nationwide survey of 222 financial executives.
According to Oversight, Atlanta, the report shows most financial executives are torn on the cost vs. benefits of Sarbanes-Oxley compliance, but a majority (57 percent) said SOX compliance was a good investment for stockholders.
While the impact of SOX compliance on shareholder value was seen as mixed, the survey showed that most companies were seeing internal benefits. Of those surveyed, 79 percent reported having stronger internal controls as a result of SOX compliance. Nearly three quarters (74 percent) said their companies realized a benefit from SOX compliance. And when asked to identify the benefits from SOX, survey participants reported the following:
- 46 percent said SOX compliance ensures the accountability of individuals involved in financial reports and operations
- 33 percent said SOX compliance decreases the risk of financial fraud
- 31 percent said they have reduced errors in their financial operations
- 27 percent reported SOX improvements in the accuracy of financial reports
- 25 percent said SOX compliance empowers the board audit committee by providing it with deeper information
- 20 percent claimed SOX strengthens investors' view of the company
But when asked what impact SOX compliance had on shareholder value, only 37 percent of those surveyed said SOX increased shareholder value because investors know they operate as an ethical business. And only 25 percent reported that SOX boosts shareholder value by building overall confidence in the market. Moreover, 33 percent claimed SOX compliance created a cost burden that suppresses stock prices, and 14 percent felt that SOX decreased their ability to pay out dividends because compliance expenses are a significant drain on earnings.
In analyzing the low numbers on shareholder value, Dr. Todd DeZoort, accounting advisory board fellow at The University of Alabama and an advisor to Oversight Systems, said "We've seen a negative reaction to Sarbanes-Oxley because it's easy to quantify the cost and extremely difficult to quantify the benefits. It's great to see perceived benefits like improved accuracy in financial reports, but how do you place a dollar value on that? The reality is that the costs of financial reporting fraud or restating earnings can be in the billions."
As part of the survey, respondents were also asked to define their feelings toward SOX legislation. Of the group, 52 percent said Congress had good intentions when it passed SOX, but the costs of compliance were not fully considered. Thirty-eight percent said SOX was Congress's over-reaction to the unethical behavior of a few executives, and 28 percent said the market requires regulations like SOX to boost investor confidence. Only 13 percent said the benefits of SOX outweigh the costs of complying while 25 percent said the costs of complying with SOX outweigh the benefits.
Although a clear majority (81 percent) think Congress needs to revisit SOX legislation, most would still include the sections that require the CEO and CFO to sign off on financial reports (Section 302); increased documentation and monitoring of internal controls (Section 404); and the timely disclosure of material changes (Section 409).
One way to control costs when it comes to SOX compliance is to deploy technology that automate some of the manual work of internal auditors or SOX consultants. Nearly a quarter of those surveyed (24 percent) said they plan to implement a technology solution to continuously monitor key controls and transactions to maintain SOX 404 compliance.
The survey was accomplished through a combination of an invitation-only online survey and survey intercepts. Titles of the 222 corporate financial leaders from across the U.S. who participated in this study included CFO, controller, treasurer, vice president and director. Of the sample, 25 percent were in companies with more than $5 billion in annual revenues, 23 percent with revenues from $1 billion to $5 billion, 22 percent between $251 million and $999 million, and 30 percent with revenues of $250 million or less.
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