The Hindu : Business : Backlash of Sarbanes-Oxley corporate reform in the U.S.

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Monday, Apr 18, 2005

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Backlash of Sarbanes-Oxley corporate reform in the U.S.

The law comes against a backdrop of continuing revelations of potential fraud and conviction on charges

The provisions in the law have raised the costs of doing business.

FOR CORPORATE America, it is always a good time to lobby — even when the public image of business is increasingly associated with executive perp walks.

Last week, business representatives gathered in Washington at an all-day roundtable discussion held by federal regulators and complained about the cost of complying with a provision of the Sarbanes-Oxley corporate reform law. Not one business leader asked to repeal the law, which was passed in 2002 after a wave of financial scandals, or to gut it. Nearly every executive, however, lamented the costs of compliance.

The criticism is striking, given that it comes against a backdrop of continuing revelations of potential fraud, criminal prosecution of fraud and convictions on fraud charges. Bernard J. Ebbers, the former chief executive of WorldCom, is awaiting sentencing after being convicted last month of fraud, conspiracy and filing false reports. Trials of former Enron executives are set to begin this week. Arthur Andersen, audit firm to both WorldCom and Enron, is still fighting to save its reputation and its few remaining assets in a lawsuit brought by WorldCom shareholders.

"There've been so many companies that have gotten in trouble, none of them want to come out now and say we oppose'' the law, said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. ``It just leaves people with a bad feeling about that company.''

He added that the last person whom he had heard was bashing Sarbanes-Oxley was Maurice R. Greenberg of the American International Group, who resigned as chief executive last month amid a review of the company's accounting and who invoked the Fifth Amendment when being interviewed by investigators last week.

``I don't think you're going to see that anymore,'' Turner said of executives' campaigning against Sarbanes-Oxley.

Instead, executives are pushing for what they describe as specific changes in the implementation of the law, while singing its praises in general terms.

``There is no question that, broadly speaking, Sarbanes-Oxley was necessary,'' said John A. Thain, chief executive of the New York Stock Exchange, in remarks echoed by others at the roundtable.

Nick S. Cyprus, controller and chief accounting officer for the Interpublic Group of Companies, was even more specific, praising a provision of the law that has become a particular target for many critics. ``I'm a big advocate of 404,'' he said, referring to Section 404 of the law, ``and I would not make any changes at this time.''

Section 404 requires companies and their auditors to assess the companies' internal controls, which are the practices or systems for keeping records and preventing abuse or fraud. Something as simple as requiring two people to sign a company check, for example, is one type of internal control.

Of the 2,500 companies that filed internal controls reports with the Securities and Exchange Commission by the end of March, about 8 per cent, or 200, found material weaknesses, the agency's chairman, William H. Donaldson, said at the roundtable. That exceeds the 5.6 per cent rate that Compliance Week magazine found in a review of the first 1,457 companies to report.

Executives at the roundtable consistently said that complying with Section 404 has been more expensive than they had anticipated, and they questioned whether the benefit — which no one has been able to quantify — is worth the cost. There are, perhaps unsurprisingly, several studies of the cost of compliance from various business groups. Financial Executives International, a networking and advocacy organisation, said last month that a survey of 217 publicly traded companies showed they had spent $4.36 million, on average, to comply with Section 404.

A different survey, of 90 clients of the Big Four accounting firms — Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PricewaterhouseCoopers — found that the companies spent an average of $7.8 million on compliance.

That was about 0.10 per cent of their revenue, and less than the $9.8 million paid, on average, to CEOs at 179 companies whose annual filings were surveyed earlier this month in Sunday Business.

The accounting firms noted that as companies become more familiar with Section 404, the amount they spend to comply with it may drop this year, by as much as 46 per cent, according to the survey. Despite forecasts like this, complaints seem to have registered with regulators. William J. McDonough, the chairman of the SEC's Public Company Accounting Oversight Board, said at the last week event that the agency would consider ways to provide more guidance on 404 requirements in the next few months.

The quiet campaign against provisions of the Sarbanes-Oxley Act may have had something to do with the proposal by Rep. Ron Paul, R-Texas, to eliminate Section 404 entirely. In a statement, the congressman said the provision ``has raised the costs of doing business, thus causing foreign companies to withdraw from American markets and retarding economic growth.''

But representatives of institutional investors emphasised that they are the real parties paying the bill for compliance, and that they are happy to do so.

Jonathan D. Glater

New York Times News Service

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