Despite a recent survey that found 83% of executives believe that the Sarbanes-Oxley Act has had a positive impact on their company, industry experts do not agree.
Reston, Va.-based Approva Corp., which supplies control monitoring and audit software to companies, surveyed 245 financial, internal audit and IT executives at public companies.
"This is pretty much the first time I have heard praises for SOX," said Paul Larson, an equity strategist at Chicago-based Morningstar. Larson related that every person he has talked to about Sarbanes-Oxley has complained about the increased compliance costs of the act.
"The benefit of the act does not necessarily outweigh the costs," Larson said. He did note, however, that the quality of information that investors receive is higher because companies are a lot less willing to play in a gray area because the stakes are too high.
Nonetheless, Prashanth "PV" Boccasam, chief executive officer at Approva, said that the survey interviewed executives who have viewed Sarbanes-Oxley as a strategic opportunity rather than a cost burden. Executives believe that Sarbanes-Oxley has had a positive impact by using the act's requirements to ensure that compliance is a process and not an afterthought.
"At Approva, we look at SOX compliance as part of an overall enterprise controls management effort that moves beyond simple controls documentation and violation detection, to encompass critical activities like preventing violations, monitoring operations and maximizing business efficiency," Boccasam said.
Senior Fellow Peter Wallison of American Enterprise Institute said that, obviously, SOX has had some positive effects on businesses' accounting and the market's reception. However, the question is whether it was worth it or not. "I've never spoken to a person who said that the benefits are close to outweighing the costs," he said.
The act has produced some value, but the industry has only learned a little from it, Wallison noted.
"Five years after Sarbanes-Oxley became law, companies are able to look back and truly see what SOX has meant to their operations," said Rick Cobb, chief operating officer at Approva.
The survey found that 70% of companies believe that their investment to comply with Sarbanes-Oxley will provide business value beyond solely compliance.
Regarding the compliance costs, which have been high and burdensome for many companies since the act was passed in 2002, 52% of respondents said that they plan on spending less money than last year, 31% said the costs will remain the same and 17% said costs will increase.
Compliance costs are going to decrease as the years pass because there is usually one big upfront technology cost the first year, and then costs are more maintenance-related the following years, Larson said.
The increased compliance costs for companies that are not doing anything wrong is adding no value, nor is SOX benefiting individual shareholders, Larson said. However, the act will catch fraudulent activities of companies, he added.
Sixty-three percent of executives said that Sarbanes-Oxley has been successful in preventing corporate fraud, up from only 48% who said so in a similar Approva survey in 2006.
Despite the majority of respondents who believe Sarbanes-Oxley has had a positive impact, they were not in agreement whether it has increased investor confidence. Fifty-one percent believe it has, and 49% do not think that investors have become more confident over the past five years.
Some companies believe that after Sarbanes-Oxley was implemented, it increased investors' confidence because they saw their stock prices increase, Wallison said. However, that is not the case. Investor confidence was never destroyed or hurt from anything that happened before Sarbanes-Oxley, he said.
Fifty-five percent of companies are switching to a software solution to automate Sarbanes-Oxley mandates, up from 28% in 2006, Approva found. Those that are using a software solution report that 50% or more of their controls are automated.
"People are getting tired of doing the same thing over and over, and will start to automate functions more," Boccasam said.
"Automated controls are starting to bring costs down, as well as reduce human error, and companies across the board have really begun to realize the benefits that a comprehensive compliance program can offer to employees and to operations as a whole," Cobb said.
George Boychuk, a partner with the securities law firm Ziegler, Ziegler & Associates of New York, works with international companies, and has not heard much positive feedback from them on SOX, either. "It has been a real burden for foreign companies, especially because of Section 404," he said.
Smaller companies have had a lot of difficulty complying with Section 404. The most contentious and costly aspect of Sarbanes-Oxley, it requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting.
Sarbanes-Oxley is perceived to be burdensome and costly for foreign companies, and some companies that are trading in the U.S are looking to potentially withdraw, Boychuk said. Also, companies that might be looking to build a stronger global presence are now opening offices in London, instead of New York, because of Sarbanes-Oxley requirements, he noted.
However, Boychuk said he has heard the other side of the argument that SOX "is good for investors and strengthens companies' financial balance sheets."
Approva also has some agreement from a regulator. "Sarbanes-Oxley is a great asset for this particular economy," SEC Commissioner Roel Campos said earlier this month.
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