SOX: Not So Bad After All?

With most of the work for Sarbanes-Oxley done, finance execs are starting to acknowledge that the corporate-governance law may be beneficial

By Amey Stone

Three years ago this week, close on the heels of WorldCom's accounting scandal and resulting implosion, President George W. Bush signed the Sarbanes-Oxley Act (SOX) into law. From day one (July 30, 2002), businesses complained that the sweeping corporate-governance overhaul was hastily drafted and a huge overreach.

Carping and calls for repeal only increased through the fall of 2004, when the law's most onerous provision -- known as Section 404 -- took effect. It required public companies to document and test their financial accounting processes to ensure reports were accurate. For most firms, this was a mammoth undertaking. And with the burden falling most heavily on small companies, Section 404 has been estimated to have cost U.S. business more than $30 billion.


  Yet, the worst may be over. While few chief executives will be lighting candles in celebration of SOX's third birthday this week, some evidence is building that the business community has not only come to terms with Sarbanes-Oxley, but is starting to see some benefits.

The evidence is from finance executives -- the ones who actually perform the work in the trenches required by SOX. A survey by businesss software firm Approva of 200 financial executives released in late June found that 44% of those polled thought the law was a "net gain to investors," while 43% called it a "net loss."

That sliver of a positive reading -- a result higher than Approva expected -- marks "a gradual turnaround in the business community's perception of the controversial legislation," according to the company.


  When asked to pick one phrase to describe the act, 42% called it a "way to improve our business controls and processes." That compared with 28% who characterized it as "a corporate tax." Approva makes software to help companies comply with Sarbanes-Oxley.

Rather than railing against Section 404, many internal auditors now view the Herculean task it presented as proof that there was a need for stricter policies to be put in place, says Harald Will, chief executive of ACL Services, which makes audit software. "The ultimate objective of Sarbanes-Oxley is to have better-run businesses, with more accurate and reliable reporting," he says, "and that's definitely happening to everyone's benefit."

Academics and economists say they need to see more concrete evidence that the SOX is working before they will weigh in on its merits. But they see some benefits already.


  "I think the biggest bang from Sarbanes-Oxley is going to be that boards and even senior management are better informed," says Wayne Guay, a professor of accounting at the University of Pennsylvania's Wharton School. "Boards of directors are dotting the i's and crossing the t's more than they previously were," he says, "which is good." But he says it is too soon to judge if they will make better decisions as a result.

The real test of Sarbanes-Oxley will be whether it improves investor confidence, says Joel Naroff, of Naroff Economic advisors in Holland, Pa. So far, he believes it has helped, but he says it is too early to tell if that benefit exceeds the extra costs for business. Still, "I don't think [SOX] had nearly the deleterious effect on costs that companies complain about," he adds.

The decline in vehement railing against Sarbanes Oxley is is because companies have already done most of the work the act requires -- focusing on earnings quality, reforming boards, and complying with 404. It is also because companies have come to realize that SOX is here to stay. "They're not going to do themselves much good to complain," notes Guay.


  There may be some relief in sight. Washington business lobbyists believe incoming Securities & Exchange Commission chairman, Representative Chris Cox (R-Calif.), will likely ease some of the regulatory and paperwork burden on companies.

But changes in the law itself are highly unlikely. "I don't think Congress has the courage to reopen SOX," says Greg Valliere, chief strategist of Schwab Washington Research Group. "They would be extremely reluctant to be portrayed as being in bed with big business."

The challenge for businesses going forward will be to find ways to make SOX provisions easier to live with. That means investing in new technology to automate the testing process, since most of the work documenting internal controls has already been done, says Will.


  Yet ACL's recent survey of internal auditors found that software to continuously monitor controls was only a midlevel budget priority. Only 12% of companies had automated control testing in place, and while 30% said they planned to implement it this year, 60% said they had no plans to do so. "So there's a disconnect," says Will. "In some cases people need to suffer more than once before making a change in their practices."

Complaints still abound, though, and many of them will be around for years. Peter Cohan, an author and management consultant in Marlborough, Mass., blames the act for rising CEO turnover, rapidly increasing audit costs, and more public companies going private.

The greatest cost he sees: "SOX is siphoning away CEO creativity," says Cohan. "It's forcing CEOs to be more worried about compliance and losing their jobs than figuring out how to invest in growth for the future."


  In Approva's study, only 8% of executives surveyed believe SOX would "improve investor confidence and help our business," while 57% said it is making U.S. companies less competitive internationally. One executive commented, "We do it because we have to. It is a waste of time and money."

Three years after passage, there's still no love in the corporate world for Sarbanes Oxley. But it's notable that more supportive voices are rising to the surface.

Stone is a senior writer for BusinessWeek Online.

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