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Can SOX Be Loosened?

Seeking relief from Sarbanes-OxleyMONTVALE – It’s broke; let’s fix it. That’s how the Institute of Management Accountants (IMA) feels about the Sarbanes-Oxley Act (SOX), the federal law passed four years ago to tighten corporate oversight, limit conflicts of interest and prevent misuse of shareholders’ money. An open meeting planned by the Securities and Exchange Commission for December offers the group hope that relief is on the way.

The Montvale-based IMA, which represents roughly 65,000 accountants from around the country, contends that SOX, passed in 2002 in the wake of several corporate accounting scandals, has produced an effect opposite from what its drafters intended. The group says the law has proven to be a costly time waster that eats up shareholders’ dollars, and places undue financial hardship on smaller publicly owned businesses in New Jersey and other states.

The IMA surveyed roughly 2,000 companies in August to find out their views. It says respondents reported that Sarbanes-Oxley “lacked practical management guidance.” In other words, it wasn’t clear to company accounting managers how to fulfill SOX’s reporting requirements.

“One might argue that an increase in shareholder confidence was good,” said IMA CEO Paul Sharman in a conference call with reporters last week. “But then there’s the point that people inside a company are being massively distracted. Studies show there’s been an erosion of $1.4 trillion in opportunity costs just because the people inside the organization have been distracted by creating documentation that was never perceived as necessary to run the business. This is true erosion of shareholder value.”

Sharman also maintained that the SEC, which oversees and enforces SOX, has failed to provide guidance to corporate management on how to implement internal control systems that will comply with the law’s beefed up reporting requirements. He said the law’s language focuses on what auditors should look for when examining a company’s books rather than on clearly laying out what the firm’s accountants need to report in the first place.

“They made it [SOX compliance] very costly and very time-consuming,” Sharman said. “They made the PCAOB [Public Company Accounting Oversight Board], which hadn’t existed previously, into the de facto standard setter on how to assess internal controls.” The PCAOB was created to oversee SOX compliance.

Sharman said if the purpose of the SEC and the PCAOB were to make sure that the shareholders’ interests were recognized and represented, “they forgot to admit that moving $35 billion out of the pockets of shareholders into the pockets of the accounting firms was exactly the opposite. It did not contribute to the shareholder wealth.”

Furthermore, if the law was intended to improve shareholder confidence in corporations, “why is it that those corporations are now withdrawing from the U.S. stock market? Why is it corporations are going to private sources of public funding?” Sharman asked.

As a consequence of SOX, says Sharman, small public companies have been delisting and there have been fewer initial public offerings. “Then you have to look at what this means to American competitiveness,” Sharman said. “We already know that the Chinese economy is growing like crazy. They had the biggest IPO in the world just two months ago.”

Many of the accountants who are hired to audit SOX compliance agree that Sarbanes-Oxley is a cost problem for small businesses. “Most professionals in the industry wholeheartedly agree that it’s a tremendous burden on small-cap companies, unnecessarily so,” said Peter A. Levy, partner in charge of Sobel Consulting Services at Sobel & Co. in Livingston. “The law never took into consideration the labor intensity or the extreme costs here. The accounting profession as a whole … recognizes that changes need to be made to insure that Sarbanes-Oxley is more cost-effective.”

While IMA officials aren’t demanding an outright repeal of SOX, they contend that major revisions are needed—now. “Our position at IMA is that SOX is the law,” says Kris Brands, director of financial systems for Allergan Medical and an IMA member. “So let’s understand what does not work and let’s fix it. We need to serve the shareholders and make sure their best interests are served by corporate reporting.”

“We tried to get to the root causes as to why companies large and small are not really close to realizing the cost benefit in their SOX programs, especially Section 404, which is all of 184 words,” says Jeffery C. Thomson, vice president of research and applications development at IMA. Among other things, Section 404 discusses the requirement that each annual report contain an assessment of the effectiveness of the firm’s internal controls and procedures for public reporting.

The IMA has offered the SEC a list of four recommended changes to SOX, one of which regards changing Section 404. And now the group may get its crack at altering the law.

“On Dec.13 the SEC has an unprecedented opportunity to get it right on SOX compliance when it presumably will discuss an early draft of its long-awaited management-assessment guide at an open commission hearing that the SEC announced several weeks ago,” says Thomson. “The IMA passionately believes that the SEC has an unprecedented opportunity to get it right on Sarbanes-Oxley’s Section 404.” He adds, “The stakes are simply too high and the clock is ticking.”

And while the clock ticks for publicly held corporations, the sound is especially loud for small-sized businesses that IMA officials say feel a relatively tighter financial pinch in SOX compliance.

“One small company spent $15,000 on software, but the one that they really wanted was four times that much and they simply could not justify that for their budget,” says IMA member Brands. “You’ve got the tools out there, but smaller companies may not be able to afford it.”

Nor do such smaller companies have the financial clout to command optimal terms during fee negotiations with auditors. “This means inexperienced, younger auditors are running these SOX audits,” Brands says.

“What I’m looking for is the silver bullet for SOX compliance—that at the end of this process, at the end of a SOX audit, compliance is demonstrated,” says Brands. “I want that compared to what’s going on today, so people instead will be saving time and money.”

E-mail to jmcconville@njbiz.com

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