Nine years later, Sarbanes-Oxley Act gets mixed reviews

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Nearly nine years after enactment of the Sarbanes-Oxley Act, legal and accounting professionals express differing views on the federal law’s primary effects. Some say it has helped to restore investor confidence in securities markets, while others say it has suppressed entrepreneurship and dissuaded companies from going public.

The cost of complying with Sarbanes-Oxley continues to decline at public companies, now that the dust around the law’s expectations has settled. Yet many still spend millions of dollars a year to comply.
 
Enacted in the wake of scandals at Enron Corp., Tyco International Ltd. and WorldCom, the Sarbanes-Oxley Act of 2002 aims to protect investors from fraudulent accounting activities at public companies. Among its key provisions are Section 302, compelling senior company officers to certify the accuracy of reported financial statements, and Section 404, requiring management and auditors to establish, maintain and routinely assess internal controls for financial reporting.
 
Deborah McLean, securities and corporate governance partner at Nixon Peabody LLP, says Sarbanes-Oxley has improved the quality and timeliness of disclosure by public companies. But the law-commonly called SOX or Sarbox-has not been a silver bullet, given the financial meltdown of 2008.
 
"And a lot of that did have to do with accounting issues at the big banks," McLean says. "They didn’t have any disclosure that they had faulty algorithms and (that) the credit default swaps were basically gambling with no underlying assets."
 
John Lowe Jr., partner at Hiscock & Barclay LLP, says Sarbanes-Oxley has improved investor confidence somewhat, but "I don’t know that the pluses really outweigh the minuses."
 
Public companies had to spend sizable sums to set up the required internal control systems and have ongoing costs for assessing and reporting on those controls. The costs are particularly burdensome to smaller companies, he says.
 
The venture capital industry maintains that Sarbanes-Oxley has complicated and slowed exit opportunities for startups and slashed initial public offerings across the country. While the number of initial public offerings has declined since the law was enacted, "I think there is no definitive answer to what’s driving that," says Lawrence Kallaur, partner at Boylan, Brown, Code, Vigdor & Wilson LLP.
 
Research shows that public companies have seen their expenses related to Sarbanes-Oxley level off since 2002, although those expenses remain significant.
 
According to Financial Executives International, public companies surveyed in 2010 paid $4.8 million on average for external auditing of SOX-related and traditional statutory financial statements in fiscal year 2009. The average audit consumed 21,458 work hours.
 
An FEI survey that focused solely on Section 404 compliance found that public companies spent on average 11,100 internal work hours and $1.7 million on the issue in fiscal year 2007. Auditor attestation fees paid by accelerated filers-or companies with market capitalizations above $75 million-were 24 percent of total annual auditing fees, or $846,000 on average.
 
Yet Sarbanes-Oxley compliance costs at Xerox Corp. are not "particularly high or onerous," says Gary Kabureck, vice president and chief accounting officer.
 
Accounting departments at most corporations have become adept at satisfying the law’s requirements and have "assimilated (it) into what you do day to day," he says.
 
Kabureck, who works for Xerox in Norwalk, Conn., and declined to disclose the firm’s Sarbanes-Oxley costs, says the law has lived up to its intended purpose. Safeguarding assets was not one of its objectives, he adds.
 
"Those of us that are close to it and work with it understand its limits. I don’t know in the general public how well that is understood," says Kabureck, who is a member of the standing advisory group to the Public Companies Accounting Oversight Board, the private-sector, non-profit corporation created by Sarbanes-Oxley to oversee auditors of public companies.
 
Nixon Peabody’s McLean says Sarbanes-Oxley cannot prevent every case of corporate malfeasance. Even the most ethical of companies that establish all the appropriate internal and disclosure controls may have "bad-apple directors," she says.
 
Entrepreneurs probably have needed to change how they look for funding since SOX was enacted, but "it hasn’t changed how they go forward with their businesses generally," McLean says.
 
Acquisitions of public companies by private ones did surge after 2002, but the constant pressure to perform in the short-term likely contributed to that phenomenon as much as Sarbanes-Oxley did, she says.
 
Boylan, Brown’s Kallaur says much of the initial dissatisfaction with SOX came from its rapid enactment and a sense of murkiness around the consequences of certain provisions. Still, public companies have learned to adjust to most of Sarbanes-Oxley.
 
"On an ongoing basis, I think the frustrations relate to the additional costs that it has imposed on public companies, particularly related to Section 404," Kallaur says.
 
The Sarbanes-Oxley provision that requires public company boards and board committees to have additional independent directors has made recruiting those individuals more difficult, he observes. Since the law’s enactment, a perception exists that the directors are more at risk for personal liability.
 
"I don’t think that’s necessarily true, but I think that perception is out there," Kallaur says.
 
Sarbanes-Oxley has stressed smaller companies, Hiscock & Barclay’s Lowe says. Prior to its passage, having less than $100 million in revenue and turning a few million dollars in profit was a viable profile for a public company. That is not necessarily the case now, and the U.S. Securities and Exchange Commission continues to look into the possibility of streamlining compliance for those firms, Lowe says.
 
"Part of the reality is that smaller issuers don’t have that much of an impact on either investor wealth or investor confidence," he says. "(If their burden is not eased), you’re just not going to have small issuers anymore."
 
As securities markets, capital formation processes and technology change, Kallaur says, securities laws and regulations will always need to adapt.
 
"So there’s no silver bullet," he says. "It’s not a question of fixing them once and for all."

Sheila Livadas is a Rochester-area freelance writer.

5/6/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].