Multiple sources cite the good and bad for Sarbanes-Oxley
By Staff -- Manufacturing Business Technology, 9/1/2005 12:00:00 AM
Overregulation is viewed as the most critical threat to businesses in both developed and developing nations, according to a CEO survey presented at the 2005 World Economic Forum in Davos. For publicly traded companies doing business in the U.S., the Sarbanes-Oxley Act (Sarbox), passed in the wake of the Enron and Worldcom accounting scandals, causes particular consternation.
In the year following Sarbox enactment, 198 companies elected to go private—nearly triple the number from the previous year, according to a Wharton study. Harvey Pitt, former Securities Exchange commissioner, has called for amending Sarbox to offset the onerous burden on small and midsize companies. Others have called for outright appeal, including Fred L. Smith, Jr., president of Washington-based Competitive Enterprise Institute (CEI).
"Sarbanes-Oxley was rushed to passage, [as was] The Patriot Act, which almost always produces bad laws," says John Berlau, journalism fellow at CEI. CEI estimates compliance is costing American business $35 billion annually. "Unfortunately, Sarbanes-Oxley does not have sunset provisions like some parts of the Patriot Act," claims Berlau. "It is harming productivity, job growth, and return-on-investment—with little real benefit."
According to The World Bank, Washington, the cost burden of regulatory compliance is three times greater in developing countries than in developed nations. A recent report on worldwide regulation from New York-based McKinsey Global Institute found that although regulations are a necessary safeguard to ensure greater competition and consumer, worker, environmental, and shareholder protection, "governments everywhere struggle to get regulation right."
Yet amid such harsh criticism from the business community, some financial executives reportedly perceive Sarbox as a net gain overall for investors. The narrow majority—44 percent versus 43 percent, as revealed in a survey by compliance solutions vendor Approva—suggests a gradual turnaround in the thinking about this legislation.
Approva's BizRights provides a platform to collaboratively manage controls and optimize related business processes to create complete audit trails for change management. According to the vendor-sponsored survey—which yielded 200 responses from financial executives—the majority of senior financial managers (87 percent) see Sarbox as a "top priority" for their company boards, while 42 percent see Sarbox as a "[positive] way to improve our business controls and processes ... to improve investor confidence." Just 28 percent answered negatively, describing Sarbox as a "corporate tax."
"Perception of Sarbanes-Oxley is shifting from viewing it as purely a corporate burden to realizing it can help improve the overall business," says Neil Selvin, executive VP of Approva. "Originally seen as an IT and accounting function, it now encompasses all business functions, and is being embraced to transform them. Companies are realizing that if they are going to invest the millions it takes to comply, they want it to be a strategic asset to the business."
According to Approva's survey, using technology to better document company controls is the primary method for automating compliance and holding down costs. Of financial executives surveyed, 66 percent are adopting advanced documentation tools, and 42 percent are automating the testing of controls. Only 24 percent are outsourcing compliance efforts.
Despite recognition of the business gains under Sarbanes-Oxley, the Approva survey also reveals ongoing negativity, including claims that Sarbox has made U.S. companies less competitive in the global marketplace. Among the concluding comments: "We do it because we have to. It is a waste of time and money, and as an international company, it's impossible to maintain consistency with our global partners."
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