Sarbanes-Oxley: Still stifling US enterprise?

Source: Exec Digital Canada

Date :13/02/2008 05:45:14

The Sarbanes-Oxley act has been causing controversy and consternation in US business for five-and-a-half years. Exec discovers if it’s still smothering US enterprise culture

By James Hurley

When the Sarbanes-Oxley Act (SOX) was signed into law five-and-a-half years ago, George W. Bush, in a rare moment of eloquence, said that it represented “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt”.

A response to the slew of corporate and accounting scandals that accompanied the turning of the new century, the Act aimed to restore public confidence in the nation’s securities markets. Yet serious questions are still being asked about the competitive disadvantage SOX places our smaller firms, innovators and entrepreneurs at when they’re looking to raise capital.

Hastily drafted

Named after its sponsors, Senator Paul Sarbanes and Michael G. Oxley, SOX established a quasi-public agency, the Public Company Accounting Board (PCOAB) to oversee, regulate and discipline accounting firms that audit public companies. That sounds like a perfectly reasonable response to Enron. But of course, you’ll probably recall that most companies’ senior management felt the reality was anything but reasonable. Before the ink had even had time to dry, our leading executives were calling the Act unnecessary, hastily drafted and a costly overreach.

In 2004, after two years of complaints and calls for repeal, the infamous Section 404 took effect. Requiring public companies to test and document the accuracy of their accounting processes, it meant a Herculean effort on the part of most firms, and in the twelve months following its introduction, it was estimated that it cost US business a staggering $30 billion. Worse, it was blamed for stifling CEO creativity as turnover at the top increased along with the burgeoning audit costs. Bosses complained that they were forced to worry more about compliance than figuring out investment and growth strategies to offset the punitive cost of the regulations.

But there’s a concise and powerful counter argument to this thinking that can be summarized in one simple question: What would have Enron’s Ken Lay made of the legislation? Not much, it’s fair to say. And there’s the rub – SOX forces the hand of corporate boards, ensuring they focus on detailed transparency, and in turn, their responsibilities to shareholders. So the principles are sound. And America’s business community does appear to be coming round – or at least softening the tone of its dissenting voice. Large companies will have by now done the hard work involved in compliance, and can hope to reap the rewards of improved investor confidence and the knowledge to inform better decision making.

“SOX has raised the awareness of finance controls and the finance department across entire operations,” says Sonya Luna, CEO of SOX Solutions, a consulting firm that solely focuses on the issues surrounding SOX compliance. “Instead of finance operating as its own bubble and human resources as another bubble, they’re really working as a cohesive team. There is a lot more dialogue.”

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