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Sarbanes-Oxley Confessionals

Sarbanes-Oxley Confessionals

by Toby Lucich on December 23, 2004

Dedicated readers of The Wall Street Journal are used to the full-page notices addressed to shareholders that either polish someone’s image or solicit their support in a battle for corporate control.

This Tuesday, however, a whole new type of notice appeared–this time with the unlikely sponsorship of PricewaterhouseCoopers. The notice bears the eye-catching caption, “Public Trust Is About To Be Tested Again.” Now, anyone with more than ten cents in the market knows these are words that will get more than one investor’s pulse rate rising (just think Enron and Worldcom). Add to this that the words are coming from the public’s mainstay for trust–namely the company auditors–and you really wonder what’s afoot.

Sarbanes-Oxley Confessionals

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Brian Moran December 23, 2004 at 7:57 am

Financial Execs Call SOX ‘Good Investment’

By: SmartPros Editorial Staff

Dec. 22, 2004 (SmartPros) — A majority of financial executives (57 percent) say Sarbanes-Oxley (SOX) compliance was a good investment for stockholders, according to a report released this month by Oversight Systems, the 2004 Oversight Systems Financial Executive Report On Sarbanes-Oxley Compliance, a nationwide survey of 222 financial executives.

However, when asked about the impact of SOX compliance on shareholder value the view was mixed. Although a clear majority (81 percent) think Congress needs to revisit SOX legislation, most would still include the sections that require the CEO and CFO to sign off on financial reports (Section 302); increased documentation and monitoring of internal controls (Section 404); and the timely disclosure of material changes (Section 409). More information about the survey, including downloadable findings, can be found at

Of those surveyed, 79 percent report having stronger internal controls as a result of SOX compliance. Nearly three quarters (74 percent) say their companies realized a benefit from SOX compliance. When asked to identify the benefits from SOX, the survey reports that:

46 percent say SOX compliance ensures the accountability of individuals involved in financial reports and operations
33 percent say SOX compliance decreases the risk of financial fraud
31 percent say they have reduced errors in their financial operations
27 percent say SOX improvements in the accuracy of financial reports
25 percent say SOX compliance empowers the board audit committee by providing it with deeper information, and
20 percent say SOX strengthens investors’ view of the company.

However, the bottom-line benefits of SOX compliance seem fuzzier when the group was asked what impact SOX compliance had on shareholder value. Many, 37 percent, of those surveyed say SOX increased shareholder value because investors know they operate as an ethical business, and 25 percent report that SOX boosts shareholder value by building overall confidence in the market. However, 33 percent say SOX compliance created a cost burden that suppresses stock prices, and 14 percent feel that SOX decreased their ability to pay out dividends because compliance expenses are a significant drain on earnings (respondents could select all that applied).

“We’ve seen a negative reaction to Sarbanes-Oxley because it’s easy to quantify the cost and extremely difficult to quantify the benefits,” said Dr. Todd DeZoort, Accounting Advisory Board Fellow at The University of Alabama and an advisor to Oversight Systems. “It’s great to see perceived benefits like improved accuracy in financial reports, but how do you place a dollar value on that? The reality is that the costs of financial reporting fraud or restating earnings can be in the billions.”

As part of the survey, respondents were also asked to define their feelings toward SOX legislation. Of the group, 52 percent say Congress had good intentions when it passed SOX, but the costs of compliance were not fully considered. Thirty-eight percent say SOX was Congress’s over-reaction to the unethical behavior of a few executives, and 28 percent say the market requires regulations like SOX to boost investor confidence in the market’s integrity. Only 13 percent say the benefits of SOX outweigh the costs of complying while 25 percent say the costs of complying with SOX outweigh the benefits (respondents could select all that applied).

“Financial executives can justifiably complain about the costs and difficulty of complying with Sarbanes-Oxley, but even this group tells you they have stronger internal controls because of the law,” said Dr. Dana Hermanson, a professor of accounting and co-founder of the Corporate Governance Center at Kennesaw State University. Hermanson is also an advisor to Oversight Systems. “The medicine was tough to take, but we see direct benefits to the company and shareholders. This is powerful validation of the legislation.”

For executives concerned about ongoing SOX compliance costs, Hermanson recommends that companies evaluate technology solutions that automate some of the manual work of internal auditors or SOX consultants. “Continuous monitoring can reduce ongoing SOX compliance costs in two ways. First, it only makes sense to leverage technology for a job that would otherwise require exhaustive time from employees or consultants. Second, you’re able to identify and correct control deficiencies as they happen when only four or five transactions may be affected. The same problem might cause 400 to 500 exceptions if you only test your controls at the end of the quarter.”

Nearly a quarter of those surveyed (24 percent) say they plan to implement a technology solution to continuously monitor key controls and transactions to maintain SOX 404 compliance. Oversight Systems, the sponsor of this survey, earlier this year was the first to introduce a transaction integrity monitoring system to analyze financial systems for controls violations, errors, misuse and fraud.

“This report confirms the important role technology will play in helping companies better align the costs and benefits of Sarbanes-Oxley compliance,” said Patrick Taylor, CEO of Oversight Systems. “Much of the SOX burden can be relieved through the strategic use of technology that automates the work of a room full of internal auditors to provide integrity, accuracy and confidence to financial reporting.”

Other interesting data points show that 45 percent of financial executives say that as individual investors they do not feel SOX disclosures and compliance requirements allow them to make better investment decisions or feel more confident in investments. Forty-four percent say that SOX has increased allow them to make better investment decisions, and 11 percent of financial executives said as individual investors they do not purchase stock in public companies. Thirty-one percent say that more than 50 percent of their financial department professionals hold financial certifications (such as CMA, CFM, CIA, CPA, etc.) from an organization with enforceable ethical codes. When asked how many full-time employees are dedicated to SOX compliance, 18 percent said more than 15, and 37 percent report that they spend more time with their CEO as a result of SOX compliance.

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