07 May 2004

Sarbanes-Oxley's compliance conundrum

Sarbanes-Oxley's compliance conundrum:

(United Press International) -- It's been nearly two years since passage of the Sarbanes-Oxley Act, aimed at mitigating investor fears after the Enron and WorldCom corporate collapses. While the act is meant to better inform stockholders of what publicly-traded companies are doing, some secondary consequences include extra regulatory costs, not necessarily better management, and diverting staff away from running the business, discussion participants noted at the American Enterprise Institute on Wednesday.

Sarbanes-Oxley is wide-ranging in its scope. In addition to creating stiff new penalties, it establishes a new Public Accounting Oversight Board, restricts the various services an audit firm can offer to its clients, and limits the time audit firm partners can serve a single client. For corporations, the greater effect is on complying with stringent new compliance and disclosure rules.

For the 12,000 public companies that file financial reports with the Securities and Exchange Commission, compliance dates for Sarbanes-Oxley (SOX) are fast approaching. Companies with market caps of $75 million or more have to file 'section 404-compliant' reports along with their annual reports for the fiscal year that ends on or after Nov. 15, 2004. For those companies with market caps of less than $75 million, the compliance date is April 15, 2005. Section 404 of SOX requires detailed examination of a company's financial and information control policies and practices -- which translates into extra expenses for public companies or those which aspire to go public.

A January 2004 survey of 321 public companies by Financial Executives International showed that of 321 companies surveyed, on average they expected to expend 12,000 hours of internal work, 3,000 hours of external work, spend an additional $590,000 in auditor's fees (an average increase of 38 percent), and an additional $700,000 in software and IT consulting, for a total of $1.9 million in first-year compliance costs. For the largest companies, the time and expense was two to three times these averages.

The costs are daunting for private companies with plans to go public, and are causing some public companies to delist, and some private companies to try and sell the company so as to not have to pay the extra costs to become SOX compliant, according to accounting firm Grant Thornton. The firm reported that since the enactment of SOX, the number of companies seeking to go private has increased by 30 percent and the number of proposed management buyouts has increased 80 percent.

Greg Bentley, co-owner of software company Bentley Systems, noted that SOX will cause public companies to be responsible for the compliance of companies they acquire after SOX goes fully into effect, which means that companies that haven't taken steps to be 404 compliant will be considered untouchable for buyout by a public company.

'We cannot afford to be public with 120 percent increases in costs,' said one respondent to a survey by law firm Foley and Lardner on the costs of being a public company. The poll of 450 publicly-traded companies showed that on average, the costs of being public increased 90.4 percent to $2,481,000 -- nearly twice what they were before SOX. And while the largest companies will see the largest cost increases, they will be best able to absorb them, the survey said, while small and mid-cap companies may face 'crippling' cost increases to go or stay public.

Bentley, who co-owns Bentley Systems with his four siblings, described how the company withdrew its IPO bid in spring of 2002 after SOX was passed, mostly because of the SOX requirement for a majority independent board.

Some say that on the one hand, having more independent boards and directors doesn't necessarily result in better management -- but on the other hand, it forces companies to make better choices about who's leading them."

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