The SarBox Fight

If you want to try something really fun, just mention the words “Sarbanes-Oxley” to a CFO. Be sure to stand back from a safe distance. If you’re not familiar with “SarBox,” this is the law that was designed to improve corporate disclosers. I won’t say that the law is a complete disaster, but let’s put it this way—it passed the Senate 99-0. Now many companies, smaller firm in particular, are complaining about unnecessary accounting costs.
This is probably a reason why we’ve seen more public companies decide to go private. So a law designed for more transparency leads to less. In fact, Georgia-Pacific’s CEO said that Sarbanes-Oxley was a factor that led to him sell the company to Koch Industries.
Earlier this week, Alan Murray wrote in the Wall Street Journal that the SarBox bashing was getting out of hand, and deserved some perspective:

A recent study by Foley & Lardner LLP found that all the costs associated with being a big public company averaged $14.3 million last year. That was up 45% from the year before, due largely to the requirements of Sarbanes-Oxley. But for a company like Georgia-Pacific, it’s still not that big a number.

Murray follows up in today’s WSJ:

The strong response to this week’s column on Georgia-Pacific’s planned merger with privately held Koch Industries has made me feel sorry for Paul Sarbanes and Michael Oxley. The Democratic senator and the Republican congressman have given their names to legislation that provokes amazingly strong emotions in the corporate world. My advice to the two gentlemen: Stay out of the for-profit sector.
That’s not to say all the responses were critical of the bill. (As always, some letters have been edited.) Daniel Posin, a law professor at Tulane Law School, writes:
“I think when you get all through, Sarbanes Oxley says to people who seek to manage other people’s businesses: ‘Have some internal controls (even if it’s inconvenient).’ “
The responses also underscored my point that Sarbanes Oxley is a much bigger problem for small businesses than it is for big ones. A few of the many emails on this point:
Brett Ayers, Assistant Vice President, First Bank, in Chapel Hill, N.C.:
“While I tacitly agree with some of your article in regards to the legislation that is Sarbanes-Oxley, I also think that, as you stated, the legislation needs to be confined to larger-cap companies. Companies like the one I work for with $1.75 billion in loans and other assets get a huge bite taken out of our bottom line for little or no improvement in our overall internal controls.”
Stephen M. Bainbridge, professor at the UCLA School of Law:
“It is true that for large public corporations, SOX-related costs are a relatively small additional burden. (Of course, for want of a nail….) But while SOX compliance costs admittedly are difficult to determine, mainly due to a lack of disclosure, the best available evidence suggests that those costs tend to be relatively fixed. According to one study by ARC Morgan, for example, companies with annual sales of less than $250 million incurred $1.56 million in external resource costs simply to comply with one SOX provision (the internal controls required by section 404).”
Lewis D. Levetown:
“SOX creates tremendous head wind in a smaller environment as key executives have to spend a disproportionate amount of time on compliance issues, greatly reducing the amount of time available for the more important issues of running the enterprise.”

Here’s a more in depth critique of Sarbanes-Oxley.

Posted by on November 19th, 2005 at 4:00 pm


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