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Wednesday, April 20, 2005
Corporate Tangle
Sarbanes-Oxley turns three and continues to tie up executive suites
By JIM MCTAGUE
IT HAS BEEN THREE YEARS SINCE a wave of spectacular corporate scandals, most notably Enron's collapse, roiled the financial markets and impelled Congress to pass a saw-toothed law called Sarbanes-Oxley. Named for its authors, a Democratic senator from Maryland and a Republican House member from Ohio, the sweeping statute covers corporate governance, financial-reporting standards and record-keeping, and is intended to promote corporate honesty and shore up investor confidence in the fairness of our financial markets. But the cost of achieving these admirable goals has been so steep for many publicly traded companies, particularly smaller ones, that it has curtailed other investments and could curb the economy's growth.
The heart of the problem rests with Section 404, which mandates that chief executives have a soup-to-nuts grasp of their companies' financial reporting and attest to the veracity of results in writing. "The CEO can be held responsible not just for the results, but for the quality of the reports," says Edward Nussbaum, CEO of the global-accounting firm Grant Thornton.
The penalty for lying? Up to 25 years in jail.
The cost of complying with SOX, as the law has been dubbed, can be measured in time and money. The Wall Street Journal recently reported that 280 companies with market capitalizations of more than $100 million continue to delay filing 2004 annual reports, in part because of SOX issues. Big corporations had to be SOX-compliant by the end of last year, while smaller outfits and foreign companies have until the end of 2005 to comply.
Compliance might already have cost U.S. corporations 20 times more than the government estimates. The American Electronics Association says publicly traded companies could shell out up to $35 billion. The Business Roundtable, which represents 160 of the largest U.S. companies, says its members paid an average of $10 million apiece in 2004. And a survey by Financial Executives International, an organization of chief financial officers, put the average cost of compliance at $4.4 million.
The law's one-size-fits-all approach makes the burden proportionally heavier for smaller companies and can have a material impact on their bottom lines. Small wonder some public companies are angling to go private to avoid SOX-related expenses. Meanwhile, some foreign companies are weighing delisting from U.S. exchanges.
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