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Monday, January 24, 2005
Midsize companies now struggle with Sarbanes-Oxley compliance
Complying with new federal laws designed to boost investors' confidence in public companies is costing millions of dollars and countless work hours at local midsize corporations -- and frustrating finance and accounting teams.
"The intention of all this was to catch the next Enron or WorldCom. That didn't happen. So in that sense this is a tremendous waste of time and money," said Stephen Hall, chief financial officer of TriPath Imaging Inc. in Burlington.
Hall, who admits his nickname is "cheap financial officer," echoes the opinions of many executives and managers working inside public companies.
Like the CFOs at other midsize public companies, Hall and his staff are in the midst of their toughest assignment: reorganizing the tracking of money through their corporation and creating new oversight for managers in every department to comply with the so-called Sarbanes/Oxley regulations.
It's an arduous task.
While major public firms with market capitalizations of more than $700 million have already been through the process, Hooker Furniture Corp. is the first of 21 Triad mid-sized public companies to finish adding the many new layers of oversight and auditing necessary to comply with the new laws.
"We've been working quite a bit, so much so that it borders on ridiculous," said Gary Armbrister, chief accounting officer at Hooker in Martinsville, Va. "I've got spouses of staff members complaining and I've even got my own spouse complaining about all the nights and weekends of work."
Armbrister has hired two accountants, hired a second auditing firm and hired computer consultants to help with new tracking. The result is Hooker's administrative expenses rose 14 percent in 2004 to $62.7 million. And the main item driving up those costs was complying with the new regulations.
"We've now got to add another layer of cost that a private company doesn't have. We are safer moving forward, but it's been rough," said Armbrister, who this week finished the 15-month task.
Enron, WorldCom fallout
Sarbanes/Oxley was enacted by Congress in 2002 in response to internal accounting discrepancies found at Enron and WorldCom that led to the downfall of those once high-flying corporate giants and the loss of billions in investors' money.
In the past, a company hired an external accounting firm to audit some transactions and check the final financial records.
Now management has to come up with a plan to track money, audit its tracking process and make improvements. Then the auditors come in to review management's plan, tests those tracking processes and then review the financial statements.
So instead of one report, management now creates two reports and the auditors create three additional reports.
For now, the immediate result is more costs for public companies.
At Tanger Factory Outlet Centers Inc. in Greensboro, administrative expenses were up 32 percent in the first three quarters of 2004. Much of that was due to higher accounting expenses, as CFO Frank Marchisello Jr. added one person while seeing his auditing fees soar and the company's profits fall.
"On the margins, around the fringes, it helps. But for the most part, it's a lot of extra expense," Marchisello said of the new regulations. "I hope that auditing fees will now go down now -- I hope."
TriPath started a year ago on this process. CFO Hall hired an additional accountant for internal audits, needed more auditing from Ernst & Young, and worked a lot of extra hours.
While the final numbers aren't in, TriPath's recent third quarter administrative expenses rose 16 percent to $3.3 million on revenues of $18 million. Hall attributes most of that expense to meeting the new regulations.
"How you document your process doesn't change anything. It's an example of government overkill," Hall said.
He points out that he has gotten additional feedback on operations inside TriPath, which may lead to improvement in the future, but no glaring problems were uncovered and no immediate changes are coming.
"Is there increased shareholder value?" Hall asked. "I would argue 'no.' "
That's a key issue.
Punishing the majority?
"Sarbanes-Oxley is only there because of Enron and WorldCom, two massive frauds and massive bankruptcies," said Mark Beasley, accounting professor at N.C. State University. "We're penalizing the entire world of public companies because of two examples that may be outliers."
He hears the complaints.
"It's a major manpower issue," Beasley said. "For every hour the auditor works, the managers are working 10."
Yet these regulations are necessary for the good all of us, said Edward Arrington, accounting professor at UNC-Greensboro.
"Clearly, accountants, auditors, CFO's and others are complaining loudly about the cost of (Sarbanes-Oxley) compliance," Arrington said. "They are, rightly or wrongly, bearing the brunt of what is a very complex social problem in which many -- politicians and professors among them -- are responsible for turning their heads in the presence of reporting abuses by corporate cons and friends.
"However, we must remember above all else that thousands and perhaps millions of innocent parties have suffered even more because of a regulatory regime that failed miserably in the past."
To meet intense client demand, Jeff Burgess, Triad managing partner for Grant Thornton in Greensboro, increased his staff by 20 percent in 2004 and is continuing to recruit accountants for jobs starting at $40,000 a year.
"Nobody had a good handle on what this was going to cost, including the (U.S. Securities and Exchange Commission) and the regulators who wrote the law," Burgess said. "Anytime you do something for the first time you have to put in more effort to get up the learning curve."
Professor Beasley asks for patience for 2005.
"I think it is improving processes," Beasley said. "There is value in this. Will it enhance shareholder value? I don't know if we can say at this point."
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