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SOX-ing it to us all
May 18, 2006
Talk about ironic.
On Wednesday, a jury of eight women and four men in Houston began deliberations in the trial of former Enron honchos Kenneth Lay and Jeffrey Skilling. Meanwhile, earlier that same day, all five commissions heading the Securities and Exchange Commission delivered a verdict of their own.
Ignoring repeated pleas the recommendations of an SEC advisory panel, Chairman Christopher Cox and the rest of the commissioners upheld the SEC’s mandate that all publicly held companies, including those with less than $75 million worth of stock in the public’s possession, must comply with the costly and cumbersome Section 404 requirement of the Sarbanes-Oxley Act.
Section 404 requires management to report to shareholders on the adequacy of the internal controls and these controls—essentially the methods by which the books are kept—must be reviewed and signed off on by the auditor(s) who are also verifying the numbers themselves.
The Commission did grant these smaller companies another extension, giving them until 2007 to comply with all the elements of SOX just as their large-cap brethren have for the past two years.
Smaller companies argue the costs prohibitive and, compared to larger companies, represent nothing more than regulatory overkill.
The SEC contends that SOX has helped restore investor confidence in the wake of the alleged out-and-out fraud committed by some executives at places like Enron, WorldCom, etc.
Numerous studies continue to show the cost of SOX compliance is declining in the second year of implementation, but those cost still represent staggeringly high figures.
A study by CRA International found that the average cost of compliance for companies with more than $700 million in sales fell 44 percent in the second year to around $4.8 million. Meanwhile, companies with between $75 million and $700 million in sales spent an average of $1.2 to comply, down 31 percent from the prior year.
What doesn’t get mentioned as much is the fact that these millions spent are, virtually without exception, a direct hit to the bottom line of all the companies which, in turn, impacts the stock price and the return to shareholders of all these companies.
Sadly, the devastation created by the misdeeds of a few people at a handful of companies is now infecting shareholders in each and every publicly held company. While we all sympathize with the employees and shareholders who were directly bilked out of their retirements, it’s doesn’t make much sense to spread the pain to everyone participating in the stock market.
But that’s where we’re at.
It’s also why it’s so important that those 12 people huddled in an anteroom inside that Houston courthouse deliver a resounding message to Lay, Skilling and every other executive who has or might consider doctoring the books for personal gain.
With or without SOX, those who are inclined to defraud shareholders will always find a way to pull it off. Making everyone jump through expensive, time-consuming regulatory hoops in effort to appear more trustworthy is foolish and punitive to everyone.
The only true deterrent to these crimes is a severe punishment that takes away the perpetrators freedom and, equally important, any and all assets accrued in the theft.
Posted by Michael Kempner at May 18, 2006 05:48 PM
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