Stanton: Sarbanes-Oxley compliance fees between my firm and accounting firms can range anywhere from 1 percent of revenues to 3 percent of revenues, or 50 percent of profits. Sarbanes-Oxley could cut off 3 to 4 percent of market capitalization, no problem.
Companies that have been working perfectly fine for years must hire additional people just to segregate duties more clearly. People like me go into companies, and we charge anywhere from a quarter million to a few million per engagement--not just me but firms I'm affiliated with--and we don't produce anything. We don't advertise anything; we don't book any journal entries; we are not a part of the business process. We are an add-on strictly there to produce a few documents.
One thing that defies common sense is that the law requires controls to be documented, so anytime you change your process you have to go back in time to readjust your reporting. Anytime you change the way you do business, install new software, start a new line of business, you need those changes documented. So all of a sudden change is the enemy; creative destruction is a bad thing. We actively encourage clients: Don't change your system; don't upgrade anything; don't change anything for the last three months of the year.
So it really stifles innovation, stifles growth. Some of our clients are systems developers, software sellers, and Sarbanes-Oxley hurt their business, because no company wanted to change [how they do things]; they've already spent time, money, and effort to document their controls as is.
It gives businesses a bigger predisposition to choose inaction over action. There's less intelligent risk taking, a bigger plus for being static and communicating less, because one of Sarbanes-Oxley's requirements is that any document you rely on, whether electronic or paper, to get to the numbers on financial statements, you must preserve, archive it so you can produce it in event of investigation. That is a very sweeping and vague requirement, meaning if someone sends an e-mail saying, "This client said they might not pay, but I'm not sure if it's just a joke," it needs to be preserved. Now they don't want to put anything in writing anymore.
Charles Wilson: Four major public companies are currently dominating the accounting field. As a result, fees continued to go up, and smaller companies like us had to go to second-tier accounting firms to stay in the business. But even second-tier firms, because of fear of liability, have become very expensive for small public companies. I'm involved in two other private companies and have been for years, so I'm quite aware of what accounting fees normally cost for private companies compared to a public one of our size, and the costs are four times higher--and that was before SarbOx came into being.
Now our accounting firms no longer can give suggestions on how to help you do better work, because they want to stay independent, and for them to remain independent they can't tell you what to do. They can only tell you you are doing it wrong. So now you have to pay two sets of independent groups, one checking internal operations to see they all are correct and another ensuring that you are doing them the most proper way.
The other problem with small companies is what you call materiality. What's considered material to a $25 million company vs. a company doing $1 billion in business is vastly different. So a small company has to pay auditors to go over every tiny item. $10 items have to be gone over carefully, whereas for a large company $1,000 can be overlooked. So that causes more money to be spent on accounting.
We will not make any money this year by the time we pay our accounting fees. Compliance has been delayed until July 2007 for smaller companies, but we have already started setting up the new systems.
And it's not just accounting fees. It's legal fees. The lawyers want to make sure you're complying with SarbOx, so you have them checking everything too.
Reason: Are there any benefits to Sarbanes-Oxley?
Merritt: Most of the law's requirements won't help investors and won't stop Enrons and WorldComs. I don't know how regulators will look investors in the eye next time there's a big blowup.
De Coster: The hardest thing for me to admit, from a libertarian yet practical corporate finance viewpoint, is that some of what is being done in the name of SarbOx compliance is very much needed within the corporate environment. The beneficial elements of SarbOx's requirements should have already been put in place by company management. Internal controls within many Fortune 500 companies were in disarray.
According to Compliance Week, which monitors the reporting of internal control weaknesses, March 2005 had 116 companies disclosing material weaknesses in their internal control over financial reporting, up from 28 for the same period in 2004. This is because '05 was the first year that companies had to provide internal control assessments as per Section 404 of SarbOx.
So is there value in SarbOx for stockholders? Yes, there is. But the fact that government usurped private processes in reaction to a host of big business failures sets the stage for a huge regulatory era in which businesses may no longer be able to operate outside of the realm of strict oversight and congressional decree.
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