Sarbox: The Blacktop To Financial Hell
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Opinion: The Sarbanes-Oxley Act of 2002, known for short as SOX, is one of those laws that was pushed through in reaction to a major issue without a whole lot of thought or debate. It's now proving to be more than just troublesome; it's becoming a detriment to the U.S. economy.
In recent months, a growing number of American firms have gone public on the London stock exchange, at least in part as a means of getting around SOX headaches. An article in the Boston Globe in January, for example, said much of it had to do with the NASDAQ being less than appealing to smaller firms, but also cited SOX headaches as a contributing factor.
Is this really what we want? America has always been a magnet for entrepreneurs to come here and start businesses in a less regulated, burdensome manner. We've drawn countless numbers of people from Europe and Asia looking to start a company, not to mention our own homegrown entrepreneurs. Now, one of America's greatest appeals is going away and we're driving companies out of the country.
Lawmakers, worried about the political impact of accounting scandals at Enron, Worldcom and Tyco, pushed through the Sarbanes-Oxley regulations (a.k.a. Sarbox as well as SOX) in 2002. Specifically, it's Section 404 of SOX that executives find so ridiculous (including the CEO of internetnews.com's parent company.)
Section 404 says that in addition to their annual reports, companies must prepare reports certifying the effectiveness of their internal control structures and financial reporting procedures. It's costing companies millions in compliance expenses. They must prove someone is cross-checking the numbers that make up earnings, such as the value of inventory and receivables.
As part of this reporting was the creation of the Public Company Accounting Oversight Board (PCAOB), sometimes called "Peekaboo" by its critics. PCAOB is a private-sector, non-profit corporation that oversees the auditors and has many government-like regulatory functions.
For starters, it defined internal controls as "controls over all relevant financial statement assertions related to all significant accounts and disclosures in the financial statements," then defined the law's phrase "attestation" as a full-blown audit of these controls. This means that everything an accountant used to audit the company can be audited as well.
So now you will have auditors second-guessing the methodologies used in audits and internal controls. Both the SEC and the PCAOB have said that a company could "fail" Sarbanes-Oxley if controls are found to be inadequate, even if no actual problems slipped through those controls, and failing could be defined as simply using older computers.
Figures for 404 compliance tend to vary, depending on the size and complexity of the company. For mid-sized companies, one law firm found that the "cost of being public" due to SOX-induced regulations have gone up by 130 percent, and there's no possible return on that investment. No C-level executive wants to hear about expenses with no ROI.
It can get expensive for the larger companies. Qualcomm said it spent $7 million in 404 compliance. A 2004 survey by Korn/Ferry International found that the law cost Fortune 1000 companies an average of $5.1 million in compliance expenses in 2004. Another survey by Financial Executives International found $3.1 million in added costs for companies with average revenues of $2.5 billion.
Much of this expense is going into data storage. SOX requires the archiving of all e-mails, all 35 billion that American businesses generate every single day. Of the $15 billion spent in 2006 on technologies for legal compliance, 40 percent of that went to SOX. Great for EMC and IBM, but can you imagine sifting through that?
This is a little of what happens when we legislate and regulate under duress, or under political pressure. Congress wanted to be seen as doing something, especially in light of the scandals that hit. SOX was passed three months before the mid-term elections, one month after Worldcom announced it would restate earnings and eventually declare bankruptcy, and six months after Enron's bankruptcy after its own earnings manipulations came to light.
Even Rep. Michael Oxley (R-Ohio), who with Sen. Paul Sarbanes (D-Maryland) wrote the legislation, admitted to the International Herald Tribune recently that not only was Congress feeling the heat from the body politic after the accounting scandals, but that he would have written the law differently.
"Absolutely," Oxley who retired in January after 25 years in Congress answered. "Frankly, I would have written it differently, and he would have written it differently," he added, referring to Sarbanes. "But it was not normal times."
In the film Fahrenheit 9/11, Congressman John Conyers (D-MI) admits that the members of Congress rarely read anything they vote on, because if they did, nothing would get passed because they would all be busy reading the voluminous legislation. He said this in discussing the Patriot Act, but it applies across the board. So I have no doubt anyone in the Congress studied this law closely and realized what kind of ridiculous burdens they were placing on American business with no benefit.
Andy Patrizio is a senior editor for internetnews.com.