Sarbanes-Oxley Costs Exceed Benefits

coondoggie writes "Two years of compliance with the Sarbanes-Oxley Act (SOX) have shored up corporate accounting practices - but with lopsided costs compared to benefits gained. Bill Gradison, acting chairman of the Public Company Accounting Oversight Board (PCAOB), said that guidance the SEC issued last year and PCAOB's latest auditing standard may not be enough to clarify the rules that govern the reporting and auditing of internal controls. 'Based on the information we already have, it would seem that some further changes may be in order,' Gradison said."

Comments

Misleading summary

[Raul654]

Here's the title of the article: "Execs tell regulators Sarbanes-Oxley costs exceed benefits". Here's the slashdot title: "Sarbanes-Oxley Costs Exceed Benefits". Notice the difference?
 
Sarbanes-Oxley is a *very good thing* - it exists to prevent another Enron. It makes CEOs criminally liable for when their companies cook the books. Amazingly, for some inexplicable reason, they don't seem to like it. Everyone reading this should go over to Netflix and add Enron: The Smartest Guys in the Room to their queues. It shows exactly how Enron was able to pull off the accounting shell-game that kept them afloat for years.

Re:Misleading summary

[Russ Nelson]

Nobody is saying that SarbOx has no benefits. Everybody is saying that SarbOx is too expensive for the benefits it returns.

Re:Misleading summary

[Bill Walker]

I think you're confusing the goal of the act with its actual ramifications. Sarbanes-Oxley amounts to a regressive cost of doing business. Small firms pay a disproportionately larger share of their revenues to comply: they have to hire a lawyer or auditing firm when they could have done the paperwork themselves in the past. Meanwhile, larger corporations merely pay more to their existing compliance teams.

Meanwhile, financial companies, especially hedge funds, are increasingly choosing to set up shop in London rather than New York/Connecticut to escape the burdens of Sarbanes-Oxley and SEC registration. Like them or not, these entities contribute a huge amount of money to local coffers: investors flock from all over the world to place capital in hedge funds, and they leave generally 2% of the investment and 20% of the profit annually with the fund managers.

No-one wants more catastrophes like Enron, but that doesn't mean we should throw the baby out with the bathwater.

Re:Misleading summary

[Anonymous Coward]

Everybody is saying that SarbOx is too expensive for the benefits it returns.

No they aren't. It's not everybody who is saying that, just the people who look at it and think, "Fuck! How they hell am I supposed to fund that?"

The rest of us went from thinking "Jesus Fucking-a-Llama Christ! That cock sucking texan just evaporated 10 billion dollars and he's living in a fucking mansion and my pension just disappeared." to "Don't like the costs? Too bad. Maybe you should have called bullshit on your peers when they were busy hiding the fact that they really weren't capable of running a business."

Re:Misleading summary

[Firehed]

Wouldn't it be even better to protect society from 'ethics criminals'? Oil companies are refusing to do anything to lower pump prices because it's not in the best interest of the shareholders, despite it being in the best interest of society as a whole. Captialism is bad for society unless society is a subset of shareholders. Yes, protecting investors from corporate dickheads is a good thing, but protecting everybody from monopolized money-loving dickheads must be a better thing.

I'm not disagreeing, I just think that our priorities are a bit out of whack.

Re:Misleading summary

[Quantum Fizz]

Meanwhile, financial companies, especially hedge funds, are increasingly choosing to set up shop in London rather than New York/Connecticut to escape the burdens of Sarbanes-Oxley and SEC registration.

Using your same logic, here in the US we should also repeal child labor laws, environmental regulation, and occupational safety laws, merely because many US companies will open shop in in other countries where there are looser pollution regulation, safety laws, etc. Think of how much business the US economy is missing out on due to these regulations pushed by 'liberals'.

The scary thing is that a typical pro-big-business Republican would agree wholeheartedly with my paragraph, without sensing its sarcasm.

Re:Misleading summary

[bnenning]

Oil companies are refusing to do anything to lower pump prices because it's not in the best interest of the shareholders, despite it being in the best interest of society as a whole.

No, it isn't. High prices encourage conservation and investigation of alternatives, which is exactly what's needed when demand exceeds supply.

Re:Misleading summary

[jcr]

Sarbanes-Oxley is a *very good thing* - it exists to prevent another Enron

No, it's killing a butterfly with a cannon. Because one company was run by a bunch of crooks, every other public company has to vastly increase their costs, which is money that isn't spent of improving their products, hiring more workers, or cutting prices to their customers.

Let me point out that it was the market that brought Enron down, not the government.

-jcr

Re:Misleading summary

[thejeffer]

You're forgetting an important fact. A LARGE percentage of America is knowingly or unknowingly a shareholder in oil companies. You know that retirement plan you have? Your 401k? Those mutual funds you bought? Guess what they include as part of your portfolio? That's right. Shares in those horrible oil companies. The American public loses sight of the fact that while high gas prices certainly hurt your pocketbook right now, there's a silver lining... in the long run, it's actually building up your retirement fund.

Now that's not to say I'm happy with the oil companies. Along with a responsibility to please your shareholders, an ethical company also has a responsibility to act for the benefit of society when they can. In the oil companies' cases, this would mean pumping some of those huge profits into R&D and building new refineries so that we have the capacity to keep artificial shortages from happening.

Just saying though... with the amount of people who hold shares in these companies either directly or through mutual funds, the actions that are best for shareholders might actually be those that are best for society in the long run.

Re:Misleading summary

[EweLambGeo]

I strongly disagree with this objection. Sarbox, IMHO, is the most poorly conceived and implemented piece of government regulation to come out of Washington since the Carter adminstration attempted to allocate gasoline deliveries at the retail level. In case you were not driving then, gas stations ran out of gas all over the US. It was awful, especially if you needed to get somewhere. What the SEC hath now wrought is a set of undefined requirements which it has told the entire American corporate world to go implement or be ... severly punished.

While slashdotters may derive a justified modicum of rightously deserved glee in this state of affairs - who here hasn't been given like orders - the economic waste on the national scale is so hideous that it needs airing. Never before has so much money been wasted on useless butt-plate.

The concept here is that corporate processes need to be audited independently to prevent fraud and malfeasance. Wonderful idea. What the SEC people had no clue about, however, was just how many processes there are churning away every day in a normal company. There are thousands! If you want to monitor the pain Sarbox is inflicting, subscribe to the alerts from CFO.com. For example, one company just found out it would have to pay its auditors - that's right, the people who failed to catch Enron's malfeaseance - $50,000 a year just to audit its employees vacations. That's not so much alone, but when you multiply it by everything going on in a company, the costs are absolutely humongous. And all of this money is going to the people who not only failed to prevent Enron but told them how to do it. Something is seriously wrong here.

Proportionately, the costs for smaller businesses are much higher (typically 20x). This has an anti-technology bias that hurts all of us in technology and eventually the whole economy. Because our start-ups are small and Sarbox denies us capital, we will not be able to hire and develop. This is bad Kool-Aid.

The supporters of Sarbox are: a) Big Labor - they are more successful unionizing big/old companies, fail miserably with high-tech startups, hate us, and actively seek to ruin us, b) Auditors - they make the money from this regulation, c) Regulators - from their perspective, regulation is always good and Sarbox means hiring many more of them.

The losers are everyone else, especially us in the tecnhology sector. I'm developing technology that could make corporate treasuries more efficient by increasing their control of liquid assets. I cannot sell it because of Sarbox and all its distractions. Ironically, corporate treasuries are so involved in dealing with the worthless regulatory minutia of Sarbox that they cannot invest the time to evaluate systems that would actually improve their control of corporate liquid assets.

I wish I could conclude this rant by recommending what we should do, but I am not as politically astute as our foes. All I can say is let's hope for the best and maybe someone out there in the political world will get a clue.

Re:Misleading summary

[Raul654]

So what you are saying basically amount to - giving an honest accounting of a company is expensive? Ok, so be it. Companies that find a way to do this cheaply and effeciently will prosper (and have their standards adopted by others), and ones that don't will tank. And in the future, investors won't again have to worry about CEOs lying on balance sheets in order to cheat the market (at least not using the same bag of tricks that worked for Enron/Worldcom/Tyco/et al).

Re:Misleading summary

[Brandybuck]

it exists to prevent another Enron

The executives of Enron broke the law. Let me repeat, in case you didn't hear: the executives of Enron broke the law. As a law abiding citizen, who naturally obeys the law just because it is there, that's undoubtedly an alien concept. It certainly is to me. So I will say it again. The executives of Enron broke the law.

Criminals do not obey the law. Sarbanes-Oxley won't prevent another Enron. It's just another law that criminals will ignore but which will punish the law-abiders.

Re:Misleading summary

[aclarke]

The idea of corporate accountability is a good thing. The implementation of SOX in many companies is an utter nightmare.

Large companies have the economy of scale to spend money and do a proper SOX implementation. For smaller companies, this is simply cost prohibitive. One company I worked at briefly left me sitting around for probably 30-40% of my day because there was no work "authorized" for me to do. I would go almost every day to my boss and ask for something to do and he would tell me straight up that there was nothing I was allowed to do. I saw opportunities all over the company and would specifically ask him if I could do x or y and would be told no. He was scared "someone" would catch me doing unauthorized work, since we had already had one poor SOX audit.

I went to a director in the marketing division and asked him if I could help him out in some specific ways until he hired for some of his positions and got a similar response. Because I was in IT, I wasn't ALLOWED to do any work for marketing. Because of SOX.

Everything we did had a paper trail, which again in theory is a good thing. Except, because of SOX, everything has TWO "paper" trails: one on the intranet, and one in filing cabinets. The old, electronically based system was not 100% SOX compliant so they had to do a paper one for SOX until <insert unreasonably expensive SOX system /> was installed.

Sure, a lot of these problems are due to poor, inept management. However, it hamstrung the 80% of us who WANTED to do a great job (including my boss) and just couldn't. This is the spectre of SOX, and why it's hurting many medium-sized publicly traded businesses.

I'm glad to be working for privately held "me" again :-)

Re:Misleading summary

[Ohreally_factor]

Well, you didn't come out and say it, so I'm not sure if it's what you have in mind, but if you mean that the very laws that give "life" to corporations need to be re-examined, then yes, you've got an excellent point. I'd go even further, and say that the very assumptions that out culture and civilization are based on need to be re-evaluated.

But who is to do such a re-evaluation? The politicians? Heh. No, it's got to be you and me. And is there any hope in hell of pushing through such changes of underlying assumptions, given that the ones who don't want the assumptions changed have guns, money, and inertia on their side? No. So, the best either you or I can do is to make changes in our own little lives, and maybe help those we come into contact with change their own assumptions, if they want it.

Ever thought of getting off the grid? Or if that's impossible, moving as much of one's life off the grid, becoming less dependent on the grid, leaving a smaller footprint?

Meanwhile, legislation like S-O might help people from getting ripped off.

Re:Misleading summary

[benna]

Of course SarbOx is not profitable for businesses. If it were, it would already have been implemented before congress passed the law. The point is that the burdensome new procedures have positive externalities which outweigh the increased costs.

Re:Misleading summary

[Bob_Robertson]

"This is dumb. And naive."

Naive maybe. Dumb? Do you understand what that word actually means?

"Completely free markets don't work."

Yes, they do, and more efficiently than regulated ones. If regulation solved problems, there would be no pollution, no corruption, no scandals.

If I promised that hitting yourself in the head with a hammer would feel better than not, and you hit yourself and discovered I was wrong, you would not hit yourself in the head again. Government has promised to solve problems with regulation and those problems have not been solved. Why do you continue to hit yourself in the head with government?

"Game theory suggests..."

Game theory is based upon zero-sum outcomes. Someone wins, someone loses. The more that others lose, the more one wins, so of course there are people who will dump on others for the greatest gain.

Economics is not a zero-sum game. Value is created specifically because of trade. A rock in the ground is worthless. A diamond ring is worth lots of money. At each stage in the process the new owner has traded some of their treasure for something they value even more, while the old owner has traded something they valued less than they gained in treasure. The final transfer very likely does not involve any transfer of material treasure yet each party deems that they have gained from the exchange.

Those in real life, not games, gain the greatest amount by having the freedom to trade what they wish when they wish. Both sides of the transaction gain the greatest tangable and intangible reward by satisfying their wants in the most mutually satisfactory way.

"...when the facts might be a few billion in economic damages or thousands of people with asbestos-induced cancer."

Demonstrate harm, prosecute harm. If asbestos causes cancer, prosecute those who knowingly continue its use. If someone does not know, educate them and then prosecute if they do not change their materials (because then it's knowingly acting to cause harm).

Now, remind me again how a free market doesn't work?

Too bad for them.

[Spazntwich]

But laws like this wouldn't really be necessary if businesses had followed the laws in the first place, huh?

Too bad it only takes a few bad apples to ruin it for everyone.

The Heavy Hand of Sarbanes-Oxley

[Anonymous Coward]

SOX is a very heavy burden on small businesses that are public. The real winners under SOX are the auditing firms.

Re:The Heavy Hand of Sarbanes-Oxley

[greginnj]

SOX is a very heavy burden on small businesses that are public.

Note the emphasis. Most posts are just saying 'companies'. Kudos to you for saying _public_. If you want to get the windfall of an IPO, if you want to have stock in your company traded on an American exchange, you submit to the relevant regulations. It's not like there haven't been any cases of unchecked corporate malfeasance screwing over the small investor, have there? So, the costs are passed on through stock dividends (or less directly, through share prices, which are essentially expectations of dividends), and SOX serves as a form of insurance against fraud for the small investor.

Not surprising.

[JKConsult]

First, of course companies are saying this. Sarbanes-Oxley requires them to do things that they don't want to do, namely properly assess their controls and have the CEO and CFO officially sign off on financial reporting.


But the real issue is that proper external financial reports aren't for the business (though they do help it, as long as the business pays attention to what they say.) They're for external users. And I can tell you right now that while banks who are looking to loan money, analysts who are grading performance, and investors who are looking to invest in a company's stock or bonds wouldn't mind seeing any costs cut, they don't think that the benefits are outweighed by the costs. They'll take the best information they can get, no matter what has to be done (within some modicum of reason.) And that's the point of Sarbanes-Oxley.

In 2004, GE spent about $33 million on Section 404 compliance, and costs ran about the same in 2005, Ameen said.
According to a quick perusal of GE's 2004 10-K, they had $20 billion in pre-tax income. I don't think $33 million is remotely too much to insure that that 10-K is correct.

'Please don't regulate me'

[maynard]

"That's the general consensus of a wide range of business executives and auditors who gathered Wednesday in Washington, D.C., for an all-day roundtable hosted by the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board (PCAOB)."

Uhhh, so who is networkworld.com, why should I believe what the regulated have to say to the regulators, and why did the article summary assert what they stated to congress as certain truth?

SOX as Damage

[bill_mcgonigle]

I appears Corporate America is viewing SOX as damage and attempting to route around it. The Charlie Rose Show had on a couple of the biggest private equity fund managers the other night and they were talking about companies which are moving headquarters and operations off-shore because of SOX. They hate it.

However well-intentioned SOX is/was, if this trend continues, we don't get the SOX purported benefits, and we lose the economic benefits of these companies on US soil.

Re:SOX as Damage

[Shelled]

Doesn't work if their stock trades on an American exchange. I work in Canada for a Canadian company and we're obliged to adhere to SOx because our stock trades on Wall Street. Thank you Enron, for making your dishonesty international.

Re:Very unpopular sentiment

[bolerobell]

Quick note. Limited Liability afforded by corporate status doesn't protect the officers, it protects the owners (shareholders) from liability.

However, I don't necessarily think that eliminating the corporate form is bad. I think it runs counter to a true free market (because corporations by design work to restrict real information about the marketplace). Combined together, I think that the Corporate Form and the increasingly unregulated markets (notice I didn't say "Free") that we have will eventually end with a severely weakened governmental system and a rise of corporate systems to fill the power gap. Then we will have a new beginning of Fedualism.

The Biggest Problem With SOX

[MCTFB]

is in spite of the complaining by companies in the Fortune 500, the relative costs of SOX are low for mega-corporations like General Electric compared to a medium-sized business looking to try and compete with the big guys. Just as many well-intentioned business regulations are designed to keep the biggest and the baddest companies from screwing the public, the biggest unintended consequence of most business regulations is that these same regulations stifle up and coming competition whose resources might be scarce and the difference between spending 33 million dollars on SOX compliance is the difference between being a viable competitor in some market and being bankrupt.

Of course SOX doesn't affect small businesses, but if you ever want to become grow and become a big business, then you are taking an extra risk once you reach the threshold of employees that forces you to effectively making paper log files of every single form of correspondence in the company. For the Fortune 500 guys, not having to worry about competition from new competition is a big win for them, and for any aspiring entrepreneur a big loss that makes you wonder if you would be better off expatriating to another country and starting your business offshore where the success or failure of your business is not tied exclusively to how efficient you are at dealing with government regulations.

Let shareholders judge the value

[bagsc]

GE's Section 404 controls cost: $33 million
GE's Market Cap: $365 billion
Percentage of Capital spent to make sure they're honest: .09%

As a GE stockholder, I'm happy with that. I will always be willing to pay .1% to ensure I don't lose 100%.

Re:Let shareholders judge the value

[MCTFB]

Is GE the only company out there who has to comply with SOX? What about the companies spending up to 10% of their revenue for 404 compliance. Just as Wal-Mart can have economies of scale when doing retail operations, any megacorp has an economy of scale in complying with SOX. Excessive government regulation has a crippling effect on small businesses and medium-sized businesses that you never hear about from the sensationalist news outlets out there. These companies and their owners are invisible as far as the masses are concerned.

All the masses care about is that guys like Kenneth Lay get stuck in a "Federal Pound You In The Ass Prison", while a lot of other companies are forced to waste scarce resources they could be using to hire more employees or else be forced into the dire choice of offshoring or inevitable bankruptcy.

It is ironic that a lot of Slashdotters seem to complain about being the victims of offshoring, but at the same time they defend laws which help to eliminate their jobs at the same time.

Duh, I could have told them that.

[Banner]

I've worked with sarbanes-oxley, it's a joke, and sadly the joke is on us. It really doesn't do anything good, it's just a knee jerk beauracratic response to increase the number of beauracrates.

Re:Very unpopular sentiment

[cpt kangarooski]

At least, until we change our tort laws so that the maximum payout is the maximum input.

So if you get sick from a hamburger, fine, you get your money back, but thats all, not 40 million dollars. Otherwise, corporate limited liability MUST stay.

That is the stupidest, most unjust thing I've seen today.

The idea of tort law is to make the victims of a tort whole, and to discourage tortfeasors and other potential tortfeasors from harming anyone else similarly.

If you get sick from a hamburger, then yes, I suppose you'd have a warranty claim for the burger having been defective, in which case the appropriate remedy would be the price of the burger.

But that's totally beside the point that the burger made you sick, causing you to rack up medical bills, lose income because you can't work, caused you pain and suffering, etc. To even suggest that the price of the burger would be just compensation for what could be quite significant injuries, is simply cruel of you.

In any event, limited liability merely refers to the liability of investors (who cannot lose more money than they invested -- i.e. if you buy $50 of stock in WidgetCo, and they go out of business, you only lose that $50) and that's it. The corporation itself is not shielded from liability, nor should it be. And its officers and management, in their capacities as such, are not particularly shielded either, though their concerns are less about tort liability and more about liability to the investors, to whom they owe a duty.

As usual, it's the "experts" who make the money.

[SeaDuck79]

I've had to follow after some of these consultants, since I work in a related industry. I've seen companies so scared to do anything that they're in process paralysis, because some SOX consultant was paid $250/hr to tell them they were going to jail in a handbasket if they didn't lock down everything that moved. Some listen when I tell them that all they have to have is good logging and a multiple-entity approval/decision tree, but some are just to shell-shocked. Unchecked Corporate greed has always been around, and does need to be regulated, but SOX is just another another example of something that government made worse.

Industry quibblers brought it on themselves

[A nonymous Coward]

I know far too many people who make excuses for Enron, saying they did nothing illegal, that California especially set itself up for disaster by deregulating only half the eletrical market.

But you know what? There are a zillion things any of us could do every day that are legal but immoral. Enron had no morals. They may have had great legal advice on how to skirt the edge, but their own admissions in email and memo, show they knew it was immoral. When the wholesale price of electricity jumps from 3 sents to 300 cents and stays there for exactly one hour before falling back down, something is wrong, whether legal or not.

Just as I have no respect for cops who complain about getting no respect when they won't turn in corrupt fellow cops, I shed no tears for business people who can't keep their own chicken coop clean.

This is the price you pay. You fuck with the public long enough, the public will fuck you back. Hell yes, it may be bad for business, but what they were doing was worse for society. So lump it, business boys and girls. You clean up your act, police yourselves, and earn the repeal or reform of SOX. Until then, I rejoice in what it does. Society is better off with the scoundrels roped in. Even if that small section of soceity call business is suffering a bit, society as a whole is better off.

Re:Business is not only a small corner of society

[Bob_Robertson]

The problem being that business isn't a small part of society. It is a major portion of how people interact.

Most of my interactions with other people, from a subscription to the YMCA to where I stop for cigarettes to the people I work with to the decision to mow my own lawn or hire a gardener, are business related.

The moment I step out of my door, which I bought, the actual number of people I deal with on a purely social level as opposed to the number of farmers, butchers, bakers, candlestick makers that I deal with on a business basis is very close to vanishingly small.

What reason do I have to be able to type to you this message but the ISP who doesn't know me on a social level at all, the Tier1 IP provider that doesn't know I exist at all, the Slashdot administrators trying to make a living by advertisements for which I am merely one few bytes of data in their database?

If it weren't for business, the price of tea in China would be irrelevant. But the fact is that by means of business, the price of tea in China is directly related to the price I see on the box of Oolong on my grocers shelf (who otherwise would have no interaction with me what so ever).

I think you need to look up the word "praxeology".

Bob-

Bzzzt. Wrong.

[Kadin2048]

This is wrong on any number of levels.

First, realize that the majority of stock in the US isn't owned by rich individuals. It's owned mostly by mutual funds, which are in turn used as part of basically every retirement plan, investment account, college-savings plan, ad infinium. If you have a 401k, you probably are an indirect shareholder in Exxon-Mobil (and IBM, and Microsoft, and General Dynamics, and probably Halliburton). If any of the big oil companies were to sneeze, the whole economy would get a cold.

Second, high-priced petroleum products, especially gasoline, is not necessarily a Bad Thing. I think it sucks as much as the next guy -- if I could click my shoes together and go back to the days of 98-cent per gallon gas forever, I'd be doing it and buying a Camaro before you could say "carbon dioxide." As much as Ma and Pa Jones of Pig's Knuckle, AR think that they want the Gubbermint to step in and 'do something' about the high price of gas, they really don't. Because keeping the price of gas low will only ensure that it gets used up faster, and that we don't do a damn thing to change our usage patterns or wean outselves off of it before it runs out completely.

In other words, cheap gasoline just makes us, as a nation, press the accelerator to the floor as we're heading towards the brick wall of No More Petroleum. Paying the real market price for gas is the fairest way to wean everybody off of petroleum products: and people are listening. Go down to a Toyota garage sometime and see how many people are looking at hybrids, versus a year or two ago. The difference is pretty impressive.

The oil companies will continue to charge what they think the market will bear for gasoline and other products; when the cost of transportation fuels starts to become a major source of pain to American families, they will modify their usage patterns. This is how things have to work: people have to understand that the era of cheap gasoline -- probably of cheap fuel in general -- is over. In the future, if you want to drive 300 miles to see Grandma instead of call her, you're going to have to factor in the $30-40 in fuel that it's going to cost you. That's reality; that's life.

I have no doubt that many politicians this election year will try to come up with all sorts of creative ways of basically subsidizing or otherwise artificially deflating the price of gas. But as they're doing their financial rabbits-from-hats routine, I think it's worth it for everyone to remember that "cheaper gas" doesn't equal "more gas." In fact, it really means 'less gas' for everyone in the future.

Re:Bring back Glass-Steagall

[Megane]

If it passed with greater than 2/3rds majority, then a lot of Democrats must have voted for it, too.

Re:Don't like the law?

[rdean400]

It's a big, bad issue and Congress must act...before the corrupt party gets thrown out of office and we have to start all over bribing a new set of lawmakers.

I think you're not being honest here. You should replace "bribing a new set of lawmakers" with "bribing the other corrupt party".