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Sarbanes Oxley : Thought Leader
Sarbanes Oxley ? Reactionary Legislation or Planned Control Mechanism?
By
Larry Byrne
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Larry Byrne
White & Case
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News Item - On April 20 2006, the Securities and Exchange Commission's (SEC) Advisory Committee on Smaller Public Companies voted overwhelmingly in favor of scaled reform recommendations for Section 404 (internal controls) of the Sarbanes-Oxley Act of 2002. In an 18-3 vote, the advisory committee agreed to a final set of recommendations for submission to the SEC.
One of the most crucial recommendations is a proposal to exempt about 70 percent of public companies from a requirement that an outside auditor certify that internal controls over financial reporting are adequate to avoid accounting mistakes or fraud. This would modify Sarbanes Oxley requirements for companies that have a public market capitalization of 787 million and below.
The major objection to Sarbanes Oxley seems to be that it is a ?one size fits all? solution to the criminality of a relatively small percentage of ethics deficient individuals ? sensationalized by the Enron, World Comm and Arthur Andersen scandals and the general dot com boom and bust of the late 90s. In that sense the law can be considered as reactionary and ultimately repressive to our economy. Arbitrary controls aimed at the few and applied to the many carry with them a certain amount of injustice and to that degree are usually counter-productive.
But what if it is simply another planned control mechanism aimed at reigning in American Free Enterprise? If this is the case, what are the chances that the Securities and Exchange Commission or the growing number of regulatory agencies including the relatively new Public Company Accounting Board will support efforts to make the law less burdensome for smaller public companies?
Apparently four of the five SEC commissioners, including Chairman Christopher Cox, have said they oppose the idea of an audit exemption for smaller companies and would prefer to revise the requirement to make it less costly for all companies. In other words ? keep the control mechanism but somehow make it less burdensome for smaller companies ? perhaps until the time when controversy lessens and the control mechanism can be ratcheted to the appropriate optimum notch.
The case that SOX is perhaps an arbitrary control mechanism may gain adherents when one considers that the act is being enforced at a time that the U.S. economy is increasingly saddled with real global competition from what appears to be co-operatively managed business/government environments in China, India and other emerging economies. Businesses in these countries are, apparently, far less burdened with compliance issues.
Are controls like Sarbanes Oxley really intended to handle threats to the public interest or is it some field leveling mechanism based upon some other globalist agenda?
How about the Basel II Capital Accord (reference www.bis.org) with a whole new set of compliance requirements for the Banking industry? Will U.S. compliance burdens lessen once this new set of controls filters down the central banking food chain to the public company sector? How will this affect the capital relationships between banks and public companies?
Is Basel II really intended to protect the public?
Thomas L. Friedman in his best seller ?The World is Flat? has done us all a service by raising awareness of the global playing field. The game of business, finance and economy in progress on this field is expanding rapidly and the rules are seemingly changing with equal speed. The drivers for this game are well covered in Friedman?s book ? but not all of them.
Who sets the rules for this business game? Is it simply individuals like a public spirited Senator from Maryland (Sarbanes) or a Congressman from Ohio (Oxley)? Does the U.S. government actually run good and efficient control over its own economy and remain completely answerable to the public interest? Believe that, and we would have to recommend a trip to Blockbuster where you can still get a copy of ?The Wizard of Oz? and suggest you watch it over and over again some long weekend.
A better solution (to faith that this is all guided by some unseen, all-knowing and beneficent government hand) may be to do some homework on the history of similar legislation. Once done, you can make your own judgment on the effectiveness of legislated ethics. Include in your research the major players before during and after such legislation (with its attendant compliance issues) was put upon the general public company sector. For example, the Securities Acts of 1933 and 1934 were also passed as a reaction to the 1929 crash - ostensibly to protect the public interest from rascals who manipulated the market. Newly elected President Roosevelt appointed Joe Kennedy as the first chairman of the SEC. Old Joe had made a huge fortune short selling the stock market immediately before the 29 crash. Talk about putting the fox in charge of the chicken coop!
The stock market is a game where for every winner there is a loser. So who received the trillions of dollars in transferred wealth in the crash of 2000? Certainly not the small investors or their ?self-directed? retirement plans. The ?global elite? financial interests pay their fines, build the cost into their numbers and carry on with the game. For example, according to MSNBC News, J.P. Morgan Chase, on 21 April 2006, agreed to pay $425 million to settle civil charges for IPO fraud and convincing plaintiffs to purchase stocks at inflated prices during the stock market manipulation of the late 90s. JPM stock decreased 14 cents or .33 % on the day the settlement was announced but easily maintained its six month strong uptrend in stock price. Their latest reported profits ? 9.23 billion on sales of 84.4 billion. JPM profits were more than 9 times the announced settlement amount. According to Bloomberg News, a JP Morgan spokesperson, referring to the settlement, stated ?It would have no material adverse effect on our financial results?.
For every seller there is a buyer and, did we mention, for every winner there is a loser.
Homework should also include some education on a subject demonstrably known to the money control wizards and largely ignored by the broad public ?including many engaged in business.
The subject?
Money, finance and investing B-A-S-I-C-S. In other words - Financial Literacy. If one does not have a good control of the language of finance, one is not likely to succeed at all much less take command of their financial future.
Likewise, anyone employed in a public company cannot help but be the effect of legislation such as Sarbanes Oxley unless the act itself is read and understood. But this poses a problem. Most legislative acts are made complex enough to give a statue a headache. Hmm ? I wonder if that is a purposed complexity. The act can, of course, be simplified and we have done exactly that with a new interactive tutorial called ?Sarbanes Oxley Simplified?.
As an amusing aside, we recently attended a trade show where a finance executive from another country visited our booth and, when asked what his interests were, said he had not made up his mind which he wanted ? the Sarbanes course or the Oxley course.
But, commercial regardless, the main point is that, whether Sarbanes Oxley is reactionary legislation or some sort of ?global elite? control mechanism, the current rules of the game ARE the rules of the game. The least one can do is study and know the rules.
Push for reform of injustice and revision of arbitrary, burdensome legislation by all means but this would also have understanding the legislation as a pre-requisite, would it not?
Notwithstanding all of the above, we agree with the ?glass half full? approach taken by many forward looking companies. Any public company of whatever size should treat Sarbanes Oxley as an opportunity to refine and improve internal financial controls and processes. You may find, as many companies have, that you will have better, more effective and timelier financial information with which to expand your business.
And, if you take this approach, the likelihood is that you will know more about the rules than the regulators and become one of the world?s flatteners rather than the ?flattenee?. If enough of us do this, there may come a day when we may be able to identify the real bad guys, ?through the rascals out? and take back control of our own business game.
Now that would be a refreshing, causative and prosperous look!
Larry Byrne
White & Case
Larry Byrnes founded Competence Software, in 1992. The company provides eLearning training products which help corporate employees understand and communicate in the areas of business finance, investing and information technology.
Sarbanes Oxley Simplified is available in CD format as well as electronic download from http://www.sarbanesoxleysimplified.com/ and with site licenses for corporate intranets.
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